Consumer Confidence index outdated, doesn’t predict economic growth –economy is too complex

The Consumer Confidence Index is a child of its time. Established in 1967 by US business association The Conference Board, it was developed in response to the first slowing of the post-war economic boom. As the momentum of growth could no longer be taken for granted, it was necessary to understand and monitor its drivers more clearly, in order to codify what might be called a theory of change. As consumption became an increasingly significant part of the economy, the model was simple: if more consumption increased GDP, boosting people’s confidence to consume would be a powerful leading indicator of growth.

The structure of the indicator was equally simple: a short survey of subjective perceptions, administered monthly across a nationally representative sample, covering the state of the national and local economy, personal financial situation, and intent to spend or save. It would swiftly prove a powerful barometer to inform business decisions, and an early response metric for government policy interventions.

As the logic of consumption spread and intensified over the second half of the 20th century, the simplicity of the CCI made it easy to scale and spread in tandem. Research organisations replicated the model, first across the US and then around the world, competing with one another to become the go-to source, selling analysis and other services with their expertise. Something close to the original model is now measured on a monthly basis in every country we have yet looked at.

The CCI's popularity reached a peak in the 1980s, when it seemed consumption might not just fuel endless growth but solve all of society’s problems too, from the Body Shop model of shopping to save the planet to Band Aid’s equivalent for global poverty. Increase consumer confidence, and all else would follow. In the early 21st century, though, much has changed, raising three important questions.

Three questions for the CCI

First, do we still want to maximise consumption? As the Beyond GDP series on this site reflects, there is a growing consensus that quantitative growth has outlived its use as the ultimate "end of chain" measure of societal success, and that some conception of well-being must replace it. The place of consumption as a driver of success must therefore also be open for question. Certainly, there is little evidence that consuming more per se drives greater well-being in any simple or direct manner, either at individual or societal scale. Even if we do still want to increase some consumption, the question of what kind is increasingly important.

From an environmental perspective, sustainable consumption is a hot topic. From a purely economic view, the former Chairman of the UK Financial Services Authority Adair Turner argues that we need to extend the distinction between consumption and "useful investment" into the private and household domain. "If credit finances consumption rather than useful investment, it is more likely that the debts created will subsequently prove unsustainable. We have always recognised that fact in relation to public debt: fiscal deficits that finance consumption rather than growth-enhancing investment are more likely to produce unsustainable public debt burdens. The same is true for private-sector credit creation."

The second question is whether measuring and reporting CCI might actually have some damaging psychological consequences. The fields of cognitive and social psychology have turned assumptions of rationality in decision-making upside down, with their seminal moment arriving as Daniel Kahneman won the Nobel Prize for Economics in 2002. More recent experiments have started documenting the troubling psychological impacts of framing people as "consumers", as regular media reporting of the CCI arguably does on a societal scale. One series, by Monica Bauer and colleagues, found that priming people with this mode of thinking (even using only the single word "consumer") can activate reactions that are more selfish and competitive, less trusting, less open to social participation, less motivated by environmental concerns and even more anxious.

Third, has the CCI got long to live even on its own terms? With the global economy becoming ever more complex, markets often provide a better leading indicator of growth than the CCI. While it remains widely reported by media outlets, other indicators are usurping its role in strategy and policy formation.

Put all this analysis together, and a picture forms of an indicator that is decreasingly used and useful, and where it is used, steers towards unhelpful economic, social, psychological and environmental outcomes. Yet in this crisis, there is huge opportunity to harness the CCI’s still significant influence and global infrastructure, and to redesign it around a more holistic model of people’s behaviour that is more suited to the times we live in.