Consumer confidence not a good indicator of economy – multiple studies prove
Hampson et al 21. Daniel Hampson is affiliated with Business School, University of International Business and Economics , and has a PhD in Philosophy from the University of Manchester– Shiyang Gong is affiliated with Business School, University of International Business and Economics, and has a PhD in Philosophy from Tsinghua University – Yi Xie is affiliated with Business School, University of International Business and Economics, and has a PhD from Peking University, “How consumer confidence affects price conscious behavior: The roles of financial vulnerability and locus of control,” J Bus Res, August 2021, 132:693-704, doi: 10.1016/j.jbusres.2020.10.032. Epub 2020 Oct 22. PMID: 33110278; PMCID: PMC7580703. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7580703/)
Amidst historically challenging economic conditions, markers of consumer financial vulnerability have heightened in 2020, notably unemployment (), bad debts (), and money-related stress (). Against this backdrop, there has been a significant rise in price conscious behavior (). In the second quarter of 2020, household spending declined by 34.6% () and the personal savings rate reached 32.2%, having been consistently below 10.0% since 2010 (). At the individual level, stricter financial management is prudent; from a macroeconomic perspective, its current magnitude is worrying given that consumer spending will be a key driver of economic recovery. As economists and business leaders look for the first offshoots of growth, increased attention has been paid to monthly consumer confidence surveys, which measure households’ subjective evaluations of the broad national economy and their personal finances (). Headlines such as that above are commonplace in the current news cycle, reflecting a widely held belief that consumer confidence data help forecast consumer spending. But how confident should we be in consumer confidence indices?
Academic literature provides equivocal evidence ( ). Several researchers have demonstrated that consumer confidence explains changes in household expenditures (, , , ) as well as customer satisfaction (), customer loyalty (), and consumer ethnocentrism (). However, the efficacy of consumer confidence data is not universally accepted. In a recent piece for the World Economic Forum, call consumer confidence, initiated by the University of Michigan in 1967, “a child of its time” that no longer serves a useful purpose. Their opinions have some support from the academic community, with several studies failing to find evidence of the predictive validity of consumer confidence (, ). In a seminal paper, concludes that “the information provided by consumer confidence predicts a relatively modest amount of additional variation in future consumer spending”.