The Conference Board Consumer Confidence Index® (CCI) strengthened further in January 2020. At 131.6 (1985=100), the top-line index is back within sight of all-time highs approached last summer. With the trade conflicts and minor recession scares of 2019 largely behind us, expect the American consumer to be the unchallenged driver of economic growth through the first half of 2020—a full decade into the current expansion. Lynn Franco, senior director of economic indicators, breaks down the forces behind this remarkable resilience. Then, she dives into the CCI's special relevance in presidential election years—including two distinct methods by which our data has predicted the reelection chances of incumbent presidents. (Spoiler alert: The two approaches currently disagree on President Trump's chances.)
The generational confidence gap The Atlantic: How Capitalism Broke Young Adulthood Return to podcast Series The news that consumer confidence just reached a seven-year high should spell some relief for Democrats heading into next week’s midterm elections, right? After all, if the takeaway is that voters are feeling better about their pocketbooks, they should be expected to go easier on the president’s party.
Well, not exactly. Historical data suggest the level of consumer confidence is a better predictor of election outcomes than the direction of the sentiment. And the magic benchmark in the Consumer Confidence Index that the incumbent party needs to hit is 100. Yesterday, the Conference Board, which publishes the measurement, placed the October number at 94.5. In nine of the 11 presidential races since the group started compiling the data, back to 1968, if consumer confidence topped 100 going into the election, the incumbent party won the White House. The only exceptions: 1968 itself, when consumer confidence registered a towering 142 but Vietnam-weary voters elected Richard Nixon to replace LBJ; and 2000, though Al Gore won the popular vote as consumer confidence soared at 143. So, what does a reading of 94.5 suggest? “That this will be more of a Republican year than a Democratic year, but not wildly so,” says Cliff Young, the U.S. president of public affairs for IPSOS, a market research company. That is, we don’t appear primed for a repeat of the last midterm elections, in 2010, when consumer confidence was bottoming out at 49.9 and Republicans made major gains. In a nip-and-tuck election, that doesn’t necessarily tell us a lot about, say, who’ll end up in control of the Senate next year. But there is another fascinating predictive trend buried a little deeper in the numbers. As it turns out, people’s feelings about the economy and where it’s headed around the time of the midterms line up strikingly with which party captures the presidency two years hence. When people have expected things to get better, the incumbent party almost always goes on to the White House. In 1974, for example, consumers’ “present” attitude registered at 61.4, while their expectations were 12 points lower. Two years later, Jimmy Carter recaptured the presidency for Democrats. Conversely, in 1982, though confidence was ebbing at 17.8, consumers had far higher hopes, by a nearly 61-point margin, and a landslide returned Ronald Reagan to power two years later. Remember, this correlation is not bullet proof. And there’s no guarantee that this relationship will continue to ring (mostly) true. To date, there has been one election in which the connection fell apart: The 1994 consumer snapshot revealed a shallow pessimism, as expectations dipped three points below consumer sentiment at the time, and Bill Clinton nevertheless engineered an easy reelection victory two years later. If the lesson for presidential aspirants is to be wary when the measures are closely bunched, the 2016 Democratic nominee (ahem) should be cautiously hopeful. The latest reading has expectations barely outpacing the current mood, by 1.3 points.
Imagine that you are talking with your neighbor in your backyard, and you mention you and your spouse are shopping for a new car, you are getting ready to refinance your house, and your spouse's brother recently lost his job. Your neighbor tells you they were recently promoted, their spouse is starting a business, and their daughter just bought a new computer. What kind of analysis about the health of the U.S. economy could an economist make based on your backyard conversation? Well, that depends on what the conversation suggests about consumer confidence. The mention of recent or upcoming purchases of a computer and a car suggests strong consumer demand. Your plan to refinance your home is a positive sign for the future, implying you are confident in your ability to meet future mortgage payments. The refinancing suggests also the possibility of lower mortgage payments, which could mean an increase in your discretionary income. Your neighbor's promotion and the start of their spouse's new business are also positive economic signs. The only negative reference during the conversation was the mention of one person who recently lost a job. But from the other information exchanged between you and your neighbor, the economist might conclude consumer confidence is high. That is good news for the economy because, on average, consumers are responsible for two-thirds of the nation's economic activity, or the gross domestic product (GDP).
Consumer confidence, measured by the Consumer Confidence Index (CCI), is defined as the degree of optimism about the state of the economy that consumers (like you and me) are expressing through their activities of saving and spending. The CCI is prepared by The Conference Board and was first calculated and benchmarked in 1985. This value is adjusted monthly based on the results of a household survey of consumers' opinions on current conditions and future economic expectations. Opinions on current conditions make up 40% of the index, with expectations of future conditions comprising the remaining 60%. On its website, The Conference Board defines the Consumer Confidence Survey as a "monthly report [detailing] consumer attitudes and buying intentions, with data available by age, income, and region." In the most simplistic terms, when their confidence is trending up, consumers spend money, indicating the sustainability of a healthy economy. When confidence is trending down, consumers are saving more than they are spending, indicating the economy is in trouble or in the process of contracting further. Essentially, the more confident people feel about the stability of their incomes, the more likely they are to maintain, or increase, their spending patterns. Each month The Conference Board surveys 5,000 U.S. households. The survey consists of five questions about the following: Present Situation Index
Expectations Index
Survey participants are asked to answer each question as "positive," "negative" or "neutral." The results from the Consumer Confidence Survey are released on the last Tuesday of each month at 10 a.m. ET. Once the data has been gathered, a portion known as the "relative value" is separately calculated for each question; each question's positive responses are divided by the sum of its positive and negative responses. The relative value for each question is then compared against each relative value from 1985, which is the benchmark because 1985 is the first year the index was calculated. This comparison of the relative values results in an "index value" for each question. The index values for all five questions are then averaged together to form the Consumer Confidence Index. The average of index values for questions about the present form the Present Situation Index, and the average of index values for the future form the Expectations Index. The data is calculated for the United States as a whole and for each of the country's nine census regions. Manufacturers, retailers, banks and the government monitor changes in the CCI to factor in the data in their decision-making processes. While index changes of less than 5% are often dismissed as inconsequential, moves of 5% or more often indicate a change in the economy's direction. A month-on-month decreasing trend suggests consumers have a negative outlook on their ability to secure and retain good jobs. Thus, manufacturers may expect consumers to avoid retail purchases, particularly large-ticket items that require financing. Manufacturers may pare down inventories to reduce overhead and/or delay investing in new projects and facilities. Likewise, banks can anticipate a decrease in lending activity, mortgage applications, and credit card use. When faced with a down-trending index, the government has a variety of options, such as issuing a tax rebate or taking other fiscal or monetary action to stimulate the economy. Conversely, a rising trend in consumer confidence indicates improvements in consumer buying patterns. Manufacturers can increase production and hiring. Banks can expect increased demand for credit. Builders can prepare for a rise in home construction and government can anticipate improved tax revenues based on the consumer spending increase. The next time you hear the results from the latest Consumer Confidence Survey, keep in mind some economists view consumer confidence as a lagging indicator, which responds only after the overall economy has already changed. The explanation for this delayed CCI reaction is it takes time for consumers to recover from and respond to economic events. The importance of a lagging indicator is it confirms a pattern is occurring. So, an increase in spending today may reflect the results of an economy that recovered a few months ago. Conversely, a decrease in spending today may confirm an ongoing recession. Some economists also view the CCI as a leading indicator, since a rise or fall of the index is a strong indication of the future level of consumer spending, which accounts for close to 70% of the economy. Since consumer spending is so important to the nation's financial health, the Consumer Confidence Index is one of the most accurate and closely watched economic indicators. The index is based on a survey of five questions posed to 5,000 households, measuring their optimism on the economy's health. The CCI, however, is largely viewed as a lagging indicator, so whatever the survey says, remember it doesn't tell us what is going to happen, but what has already happened. |
What does the consumer confidence index use to predict presidential election results?
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