Why Consumer Confidence Is Key to Fighting Inflation
Narrator: This is an economic surveyor. He’s doing something kind of radical. Well, for back then. He’s not asking her about her finances. He’s asking her how she feels about her finances. He’s surveying for the Consumer-Sentiment Index, one of two main measurements of –
Janet Yellen: Consumer confidence.
Jeremy Powell: Consumer confidence is very low.
Narrator: Consumer confidence, how people feel about the strength of the economy now and in the future. Here’s how it became an important indicator and why the Federal Reserve thinks it’s the key to bringing down inflation.
Consumer confidence is different from other measurements because the man who created the first survey, Dr. George Katona wasn’t just an economist, he was also a psychologist. He began surveying consumers in 1946. Before that, according to his book, economic surveys were all about asking people what their changes in income were, numbers. But he thought it would be important to know how people felt about their personal finances and the changes they expected.
Jon Hilsenrath: You have all these economists walking around with all their spreadsheets and all their numbers. You know, you have these Fed officials getting up there and speaking a language nobody really understands. And then at the end of the day, so much of all this comes down to feelings.
Dr. Joanne Hsu: To me, economics is a social science. I am also one of those folks that’s running around with a clipboard and…and looking at spreadsheets.
Narrator: Dr. Joanne Hsu is Katona’s successor at the University of Michigan where she oversees the survey for the Consumer-Sentiment Index.
Dr. Joanne Hsu: I have always been really interested in how people make economic decisions and what better way to learn about that than just ask people?
Narrator: The survey, conducted by calling a nationally representative sample of people on their cell phones asks five questions that are nearly identical to the five asked 70 years ago. Compared to a year ago, financially, are you better-off or worse-off? What do you expect a year from now? In a year, what do you think business conditions will be? In the next five years, do you expect continuous good times or unemployment and depression? And when it comes to major household appliances, is now a good time or a bad time to buy?
Dr. Joanne Hsu: We wanna make sure that our questions are…are timeless and are not really specific to the ‘60s, specific to the 2000s.
Narrator: The five questions are calculated into the Consumer-Sentiment Index. The higher the number, the better consumers are feeling. The lower the number, the worse they feel. And it’s a pretty reliable indicator.
Dr. Joanne Hsu: And if you look at our consumer confidence measure and you look at GDP growth, you can see that consumers actually do a really good job anticipating changes in GDP. A majority of GDP is consumer spending. So what better way to understand where GDP is going than to understand how consumers are behaving?
Narrator: In the 1960s, as consumer confidence began to be regarded as an important measure, another survey began, appropriately named the Consumer-Confidence Index, run by the Conference Board. You can see the results are pretty similar to each other, but their questions are slightly different. The Conference Board asks more about your job, like do you think there will be more or less jobs in your area in six months? So their index is more receptive to consumers’ feelings around the job market, while Michigan’s index is more receptive to inflation. You can see the difference in the 2008 recession. As people lost their jobs, the confidence index dropped more than the sentiment index.
Dr. Joanne Hsu: If you focus more on labor markets, you’re gonna have higher levels of confidence. If people are focusing more on inflation, that’s something that will show up on…on…on our data.
Narrator: In 2022, that is showing up.
Jon Hilsenrath: And what we’re discovering now with these falling sentiment numbers is that even though the job market is really strong and unemployment is really low, Americans are very frustrated and pessimistic because of the inflation they’re experiencing.
Narrator: And these indexes have become leading indicators because they both indicate recessions. Often, when they begin to drop, a recession follows. Well, except for this blip here in 2011.
Dr. Joanne Hsu: It was not followed by a recession. Sentiment was extremely low because of the debt ceiling negotiations and that was a factor that was lifted very quickly.
Narrator: But the drop in sentiment in 2022 has economists worried.
Jon Hilsenrath: It’s why the Federal Reserve is very focused on convincing people, and why you hear people like Jay Powell say he’s gonna get this under control because he doesn’t want people to start thinking that inflation is here to stay.
Jerome Powell: We think that the public generally sees us as…as very likely to be successful in getting inflation down to 2%, and that’s critical. It’s absolutely key to the whole thing.
Jon Hilsenrath: There is definitely a potential for self-fulfillment when it comes to inflation. The specific way this typically happens, if people believe that inflation is going to get worse, they might start stockpiling and buying more now if they believe prices are gonna go up in the future. And if they front load their consumption and bring their future consumption into the present, that is an increase in demand and that will increase prices by itself.
Narrator: It’s why the Federal Reserve doesn’t just need to lower inflation. Chairman Powell needs the public to feel confident that they will.
Jon Hilsenrath: Jay Powell is playing a mind game right now. He’s out there to convince not only the public but the markets that he’s not gonna allow this thing to get worse and that he’s gonna get it under control.
Narrator: The confidence indexes can’t make consumers more confident, but at least they provide a measurement of how they’re feeling.
Dr. Joanne Hsu: Consumers, workers are the backbone of the economy. Understanding their intentions and…and their…and their experiences in the economy tells us a lot for the trajectory of the economy.
Narrator: Thanks to a psychologist who understood that behind all these economic numbers are people.