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December 31, 2004

Getting in Touch With Our Economic Feelings

We’ve see it on television almost every day, it seems.  Within seconds of a dramatic event – winning a race, scoring a touchdown, or finding a lost child – the central figure is asked by an eager reporter, “how do you feel?”

As an economist, I am generally squirming in my chair at this point.  Not because economists have no feelings -- we actually do, even if we tend to express them using graphs and equations.  Rather it is because we believe that the best way to gauge our feelings is to observe our actions. 

Naturally, the actions we study most closely are the buying and selling of things, like goods and services.  When we as consumers buy something, especially when it is a high priced item, it tells us a lot about how we feel about our economic status and security, both now and in the near future.  If we’re buying peanut butter and jelly, or rebuilding the engine for the third time on our 1974 Nova, that says one thing.  But if we start going out to eat at expensive restaurants and we take out a loan for a second home, it says another.

How consumers feel about the economy is tremendously important for those in the business of selling things.  That’s why at least two nationally recognized organizations  regularly conduct national surveys to assess consumer confidence.

The results of the Conference Board’s surveyshow a marked jump in consumer confidence for the month of December.  Specifically, the index of consumer confidence tallied from results of questions asked in the survey went from 92.6 percent in November to 102.3 percent in December.

In one sense, the meaning of this change couldn’t be more straightforward.  Consumers are more confident today than they were 30 days ago.  We know this because we asked them, and that’s what they told us.

It’s when you try to translate that confidence into something you can actually see – like buying behavior – that it starts to get tricky.  Because the correlation between the monthly gyrations of these confidence indices, and how and where money is spent, is a lot weaker than you would expect.

The years immediately following the recession of 2001 are a case in point.  This was a recession in which consumer spending never failed to grow, even as the rest of the economy faltered.  But there were certainly some quarters that were better than others.

One of the worst, from a consumer confidence perspective, was the fourth quarter of 2001.  In the immediate aftermath of the September 11 attacks, consumer confidence fell almost 40 percent.  Yet in that same quarter, consumer spending grew by almost 7 percent, the fastest single quarter growth spurt in 15 years.

Consumer confidence came roaring back in the early part of 2002, yet consumer spending growth cooled markedly.  And as we came into 2003, a year when confidence fell to its post-recession low point, consumer spending heated up.  Overall, 2003 was a better year for spending and the overall economy, yet confidence last year was significantly lower than the previous year.

Whether it was the Iraq war, the drumbeat of news of weak job growth, or the presidential campaign, people consistently told surveys they felt worse about the economy than their own spending would indicate.  That’s even more apparent when you consider that spending on things involving long-term financial commitments, like housing, was riding at the head of the pack.

But then economic indicators are a little like economists themselves, I suppose.  We don’t always agree.  Consumer confidence remains one of the most important ingredients to economic growth, no doubt.  But the experience of recent years calls into question the best way to measure it.

Link to this commentary: https://commentaries.cberdata.org/287/getting-in-touch-with-our-economic-feelings

Tags: economics


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He has been involved with economic forecasting and health care policy research for over twenty-four years, both in the private and public sector. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. He attended the University of Michigan, receiving a B.A. ('79) and Ph.D. ('86) in economics.

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