By Lambert Strether of Corrente.
The consumer confidence report came out the other day, but before I get to it, I want to present the best Economics 101 YouTube ever (hat tips, Louis and hunkerdown). I can’t explain why it’s the best, because that would be totally a spoiler; suffice you wouldn’t have heard better at Jackson Hole, if they’d let you past the velvet rope, and certainly not in one minute and fifty-five seconds. So herewith, Monty Python’s Flying Circus Episode 35, Chapter 5: “Mystico and Janet: Flats Built By Hypnosis.”[1]
So, when you hear economists or financial journalists or stock touts analysts or squillionaires talk about “confidence” (synonym “sentiment”) you know — having watched the video — exactly what they mean and what the effects of having and not having it are. Quoting a non-spoiler part of the script:
VOICE OVER: But the obvious question is are they safe?
Indeed!
That said, let’s look at the latest “Consumer Confidence” results[2]. I don’t think I have anything very exciting to say about them; they aren’t cooked up in an RV out in the desert by a gang of statistical Walter Whites, unlike the Cost of Living Index, for example. Bloomberg (August 26):
Consumer Confidence in U.S. Rises to Almost Seven-Year High
Consumer confidence in the U.S. unexpectedly climbed in August to the highest level in almost seven years, reinforcing signs of a strengthening outlook for the second half of 2014.
The Conference Board’s sentiment gauge rose to 92.4, the highest since October 2007, from a revised 90.3 a month earlier, the New York-based private research group said today. The median forecast in a Bloomberg survey called for a decline to 89.
Americans are finding more reasons to be upbeat about their prospects for the rest of the year as recent reports pointed to a pickup in the job market and stock prices advanced to records. Stronger sentiment will also help underpin consumer spending, which makes up almost 70 percent of the economy.
So, great. “Consumer confidence” is a lagging indicator, meaning that happy days are here again before anybody actually notices the happiness. Do note, however, that Bloomberg says that the “unexpected” results are driven by “recent reports” from the job market, which have a sketchy relation to the real labor market, and “record prices” in the stock market, which has a way beyond sketchy relation to the real economy, being kept high (a) by the Fed’s low interest polices and, possibly, (b) worse things (“Are U.S. Markets Liquid and Deep or Rigged and Broken?”). So you could look at consumer confidence two ways: You could say Homer and Marge have work and are pretty sure they won’t lose the house and so they’re going to spend on stuff. Or you could say that propaganda works. Or both! Confidence being, as we see from “Flats Built By Hypnosis,” what it is.[3]
So here’s how the data for Conference Board’s “Consumer Confidence” index is collected:
Each month the Conference Board surveys 5,000 U.S. households. The survey consists of five questions that ask the respondents’ opinions about the following:
- Current business conditions.
- Business conditions for the next six months.
- Current employment conditions.
- Employment conditions for the next six months.
- Total family income for the next six months. Survey participants are asked to answer each question as “positive,” “negative” or “neutral.”
The index values for all five questions are then averaged together to form the Consumer Confidence Index. The average of index values for questions one and three form the Present Situation Index; and the average of index values for questions two, four and five 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.
Interestingly, in this release, “Present Situation” and the “Expectations” indices diverge:
Disclosed in the component readings was that the Present Situation Index rose to 94.6 from 87.9 and the Expectations Index fell to 90.9 from 91.9 in July.
So, we reached the peak of the roller coaster, and we’re already — Consumer Confidence being a lagging indicator — headed down? (Perhaps that’s why another Conference Board index, “CEO confidence,” is (already?) down.) I’m not sure why Expectations would be down; perhaps it’s because although people have more work, the wages are crap, and people don’t expect them to get better.
To me, living up here on the margins in Maine, it’s the regional variations that are of interest, more so than the national figure. In Florida, for example, consumer confidence was flat (although from a state survey). In Arizona, it fell. In Utah, it rose. (And so on. I can’t find a state-by-state compilation of economic figures; readers?)
Bringing me closer to “real life” and a question, readers, for you. We are, I think, intended to take the Consumer Confidence Index as a proxy for the health of “the economy.” And whenever you hear the words, “the economy,” you should always ask “Whose economy?” and in two senses. The first, who owns the economy and its outputs, is a topic for another day. The second, our tangible experiences with the economy in our milieu, is our topic here. Note that the Conference Board’s methodology doesn’t ask the first question; and it can’t answer today’s question, either: “Current business conditions” is an average, and like all averages conceals as much as it reveals. I consider we should never have been taught to average, as schoolchildren:
The law of general average is a legal principle of maritime law according to which all parties in a sea venture proportionally share any losses resulting from a voluntary sacrifice of part of the ship or cargo to save the whole in an emergency. In the exigencies of hazards faced at sea, crew members often have precious little time in which to determine precisely whose cargo they are jettisoning. Thus, to avoid quarrelling that could waste valuable time, there arose the equitable practice whereby all the merchants whose cargo landed safely would be called on to contribute a portion, based upon a share or percentage, to the merchant or merchants whose goods had been tossed overboard to avert imminent peril. While general average traces its origins in ancient maritime law, still it remains part of the admiralty law of most countries.
(I learned this factoid from Greg Grandin’s excellent Empire of Necessity.) So, much as one merchant’s loss of a chest of precious jewels would be averaged together with another merchant’s loss of some bales of cheap clothing, so the “business conditions” in a town where one business is doing very well and many others are shuttered could average out the same as a town with many businesses doing OK, even if none of them are spectacular. And I know which town I’d rather live in, and which town I’d consider healthier and more sustainable. However, the Conference board methodology of asking about “business conditions” isn’t granular enough to help us distinguish the two cases, or any of the cases between the two.
And so we come to anecdotes, hopefully revealing. I have two. One comes from a friend, who had a horrible time getting from an airport hub in a big city out to his peripheral small town at the end of the line. Flight delays and cancellations, lost luggage, Soviet-style service, corporate behavior that sounds like the railroads, back in the day, trying to get rid of unprofitable passenger trains with random scheduling and filthy coaches, leading to route cancellation. And yet “business conditions” for the hub and the small town would be averaged together regionally, despite the very different present experiences and expectations of the two. The extremities begin to cool first, I said.
And then there’s Maine. I recently had a pleasant visit to the coast of Southern Maine, and “business conditions” seemed very mixed. On the one hand, on the busiest week of the season, before Labor Day, there were empty parking spaces in the twee tourist trap town — and I mean that in the nicest possible way — that I visited; unheard of. The big supermarket lot had plenty of spaces; likewise the outlet parking garage, generally packed. Traffic was down. On the other hand, fancy lobster places were doing brisk business; the Coastal Maine Botanical Gardens, said a guide, was doing very well, and quite clearly had money to spend; and there was some new construction (not evidently being done by hypnosis) that looked like a big box store. I interpreted this, tentatively, as another sorting process: Those doing well did better; those doing worse went under, or started to.
Readers, what concrete indicators (not media reports, not data) do you have for “Present Conditions” and “Expectations” in your immediate milieu?
NOTES
[1] “Flat” is British for “apartment.”
[2] I’m very leery of being identified, as for example by ObamaCare, as a “consumer,” as opposed to, say, a citizen, or a downwardly mobile humanities major manqué, or a sort of amphibious System D working person.
[3] I believe George Soros might call this “reflexivity,” the principle that “distorted views can influence the situation to which they relate because false views lead to inappropriate actions.” Wikipedia excises the “distorted,” “false” aspect, simply stating that “reflexivity refers to the self-reinforcing effect of market sentiment.” “But are they safe?”
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Reports of new highs in consumer confidence have followed a predictable pattern for several years:
1) media blitz whwn any economic indicator suggests strengthening recovery
2) new high is then disclosed as evidence in support of said recovery
3) economic indicators fail to correctly forecast conditions over the following two months
4) consumer confidence falls to annual low.
I know a person who is convinced the economy is about to take off “because the stock market is doing well”, (well being defined as a greater number than the day before; amateur speculator, can’t be convinced to adopt a more sophisticated position). Each positive indicator is taken as supporting this conclusion, while each negative indicator is categorically dismissed. It seems to me that Americans in general are culturally wired to expect the jackpot is just around the corner and will grasp at any hopeful sign, even when their experience tells them it’s an illusion.
YES!! I’ve been referring to this Monty Python skit for years to make this point! So glad to see it getting traction.
And I agree with your comments too. Right now, things where I live in southern Maine are looking better—more help wanted sings at the local businesses than I’ve seen in awhile.
We should watch that skit daily IMHO. I have always believed that the genius of Monty Python is greatly under appreciated. Hopefully others will draw a connection to the article on the confidence of the Fed as re-brands its snake oil for our consumption daily. On the subject of confidence, I like what Bertram Russell once said: “The trouble with the world is that the stupid are cocksure, and the intelligent are full of doubt.”
More anecdotal evidence from Southern ME – some fairly small homes in my neighborhood (<1500 sqft) are selling for over $300K, more than they were before the last real estate bust that crashed the whole economy. Meanwhile banks and credit unions won't lend to many people I've talked to, even those with pristine credit scores, and I can't say I blame them. My read is they realize housing is overpriced and don't want homeowners maxed out on equity when it all comes crashing down again. Those home prices are simply not sustainable given the prevailing wages in the area which are not at all good.
Perhaps all those help wanted signs are because so many people have high-tailed it out of here because they can't afford homes any more…
“…when the independent variable of one function is the dependent variable of the other, neither function has a genuinely independent variable. This means that the cognitive function can’t produce enough knowledge to serve as the basis of the participants’ decisions. Similarly, the manipulative function can have an effect on the outcome, but can’t determine it.”
Thank you, Lambert, I had no idea of Soros’ thoughts on this. Funny how many great practitioners, like Munger and Boyd, also spent much time in the same thought-taiga.
Your source that consumer confidence is Investopedia. According to the Conference Board, which conducts one of the two big surveys, the other being the University of Michigan, the future expectations component of their consumer confidence report, is a *leading* indicator. In fact it is one of the 10 official components of the Leading Index, and has been for years. Here’s the link to the Conference Board’s explanation: http://www.conference-board.org/data/bcicountry.cfm?cid=1
If there is a way to get the graphs to you, let me know and I will show you the consumer confidence reports going back 50 years. They aren’t perfect, but the expectations component in particular does lead, turning down before the economy as a whole does.
Thanks. But I guess leading and lagging would depend on the weighting of Present and Expectations?
The Conference Board uses only the ‘Expectations’ component:
BCI-125 Avg. Consumer Expectations for Business and Economic Conditions … is an equally weighted average of … (1) Consumer Expectations for Economic Conditions 12-months ahead from Surveys of Consumers conducted by Reuters/University of Michigan, and (2) Consumer Expectations for Business Conditions 6-months ahead from Consumer Confidence Survey by The Conference Board.
https://www.conference-board.org/data/bci/index.cfm?id=2160
FRED don’t know about the Conference Board (maybe they are data retentives or something), but you can examine a chart of UMich consumer sentiment here:
https://research.stlouisfed.org/fred2/series/UMCSENT
UMich sentiment bottomed out in Nov. 2008, eight months before the recession ended in June 2009. This supports the Conference Board’s view that it has leading characteristics. In this case, Investopedia seems to be out to lunch.
What Jim Haygood said. Normally Investopedia is a good source. I don’t know where they were coming from in the paragraphs you linked to.
The “present conditions” component has been rising, but the “expectations” component has been basically flat, just as they were in the middle of Bush’s expansion.
If you believe in rational expectations, people have ALREADY acted on what they expect.! Hence the index is at best a concurrent or even a lagging indicator.
Some economic observations from Mason City, pop. 27,000, in northern Iowa:
Corn prices have dropped to under $4/bushel from up to $8/bushel a couple years ago. Production costs are above $4/bushel and some farmers are questioning the high cost of gmo seed. Down the road in Waterloo IA, John Deere has announced layoffs of 1000 mostly high paid union jobs. Down another road in Forest City IA, Winnebago Industries which builds all the RVs is seeing record profits and is just about always hiring–it’s non-union and pays staring production line workers $12.65/hr.
Lots of help wanted signs–mostly low wage retail, fast food, etc. for $8/hr. Rent’s high, at least for this neck of the woods–$750 for a 2 bedroom dump, even though there is a house for sale every block for cheap. Teachers are being laid off. KMart pulled the plug and Sears is down to selling tools and tires only. No new businesses to speak of. Used car lots everywhere, plenty of pawn shops and payday loan ops. Locals are concerned about blacks moving in from Chicago and Mexicans moving in from anywhere–citing an increase in crime.
A pretty pedestrian and typical economic story for most of the country I would imagine.
Did I mention that the local hospital seems to be doing well? At least they’re hiring doctors and nurses.
That’s a weird paradox on rent levels and for sale signs, isn’t it? Is it because only “outsiders” rent?
Used car lots, payday loans, and pawn shops… I wonder if there’s a index for that?
Speaking from the perspective of another (rather distorted) part of Iowa (Iowa City), the high rent/high home volume is not all that weird. Since the floods of 2008, which were particularly bad in Eastern Iowa, There was a sudden uptick in the number of people needing rental housing (because the floods displaced them) but they were not ones, generally, who, once the waters receded were in a position to buy a home/get a mortgage. In Iowa City, the University gobbled up most of the available real estate in order to fulfill it’s needs, so the housing market changed very little. However, in other places, the housing market was on a downturn like everywhere else in the country, and the floods did little to change that state of affairs with regards to home sales. What happened was the available rental inventory diminished as demand skyrocketed. Home inventory and home demand more or less kept pace with each other in some places or got worse (as anywhere else), i.e. lots of homes plus low demand/availability of credit.
Lots of foreclosures and a declining population base cause the housing glut, the ones who lost their homes need a place to rent, and fewer folks in general qualify for a mortgage, so rental demand goes up. The usual.
Much of my area looks increasingly like Appalachia with a touch of northern England thrown in.
What I deplore about low corn prices is that they hike the margins of the ethanol scammers:
http://www.card.iastate.edu/research/bio/tools/hist_eth_gm.aspx
May corn soar to $10/bushel and shut down their dark satanic mills.
-When we start to see arguments on whether or not there is a bubble… that typically means there is a bubble and it’s time to take cover.
-When the main reason for future equity returns is based on skinning retail which has not jumped in yet… at least past cycle were based on illusory future earnings growth. Now it is based on right in daylight predatory expectations.
-Whacky M&A deals… for example primary M&A goal based on tax minimization when the tax code stipulates that a deal’s primary goal can not be to minimize taxes… in Canada anyway, not sure about US?
Lambert;
Greetings from the Deep South.
I usually look at how many empty storefronts there are in the ring suburb strip malls. There is construction going on, but not nearly as much as in the ‘good times.’ Most of that looks to be in connection with the areas where what’s left of the middle classes are relocating to. It used to be called “White Flight.” Now we should call it “Class Flight.” Otherwise, there are loads of empty, or even not built out strip mall storefronts. We shop at two health food shops in our mid sized town. (A quasi college town, so there is demand for those products.) One, an older establishment, just bought outright a failed stand alone Gym and are converting it to their use. (The proprietor told me that the family got the site, approximately 7000 square foot single story, adjacent to the towns only big mall, at very good terms out of a bankruptcy.) The other, smaller store doesn’t have deep pockets, and the proprietor is struggling. She told us that the site, which is in a largish strip mall, in the same general area near the big mall, is managed by an out of town corporation. This strip mall has several empty storefronts, and the managers have raised rents every contract renegotiation cycle for all the tenants for the last ten years. Seing that the bigger healthfood store has moved close to her location, the second store owner is now considering moving her outlet to a new retail zone that is starting to grow in an area, ten miles out of town. This new retail zone is centrally located to a cluster of “upscale” country club developments out in the exurbs. The new zone already has a Whole Food clone grocery, a cluster of dentists and specialty physicians: dermatologists, a fertility clinic, sports medicine, an addiction clinic, and the like. This ‘upper class’ haven is where most of the new construction of any sort is going on. In the rest of the town and environs, construction is mainly confined to renovations and demolitions.
This is in the hinterlands of Mississippi. We also take frequent trips down to the Coast. Things are marginally better there, but not much. The casinos have become the dominant non governmental economic actors there. A funny thing is happening there. Big out of town, really they were mainly out of towners from the beginning, but smaller actors, are buying up the smaller concerns and consolidating operations. One telling indicator is the fate of the Margaritaville project situated right on the coast. The Margaritaville project got to the stage of having three stories of the reinforced concrete columns and floors up and then stopped. Money problems was the rumour on the street. The project sat there like that for several years. Now, the concrete work on those three floors has been demolished and the site returned to pristine flatness. That is a lot of money wasted. Meanwhile, Harrahs bought the casino right next door, and Margaritaville bought a smaller running casino located on the Back Bay and rebranded it. The problems with that should be obvious. Atlantic City NJ is the canary in this coalmine. If casinos in Atlantic City arte closing, in an area where people have much more money floating around, how does anyone expect Mississippi, which is much poorer, and, on the coast, heavily retiree, to do any better? I read somewhere that most of the profit for any casino comes from locals playing mainly slot machines. All the rest, big poker, tuxedo clad roulette players, and the rest are strictly window dressing. The bottom line is, when the locals have to start scrimping to make groceries, the casinos will suffer.
Laissez les bons temps rouler!
Thanks very much for this. A very clear picture. The upper class haven is the sort of sorting process I was wondering about. I wonder where else it’s taking place?
Lambert;
From my time in construction, with the exception of high density population centres with little land to expand into, this phenomenon has been happening as long as population is growing, and commutes to work are manageable everywhere else. One tell is what kinds of service shops and occupations cluster where. In highly concentrated low income areas, look for pawn shops, title loan storefronts, payday loan sharkeries, and medical storefronts specializing in medicare and Medicaid services. An outfit calling itself Kool Smiles is one such. Specializing in Medicaid pediatric dentistry, they are being investigated in several places for unnecessary procedures. It seems to be their forte. The presence of it and other such scammers are an indicator for an ageing and poorer population. The percentage of public vs. private schools is also a tell. Higher incomes give access to more expensive private education. Having spoken to several people who have worked in some of these private academies, the basic kid population in them is usually highly visible ‘rich kids.’ The real estate online sites usually rate the local schools. That can be useful in helping determine what kind of neigbhourhood it is.
These upscale suburbs aren’t necessarily your average gated community, but simple geographical isolation can achieve the same result.
One thing that I can remember about St. Tammany Parish in particular is that as the area gentrified, the major corporations moved their satellite offices from New Orleans to the Parish as their workers shifted their place of habitation. Land was cheaper, taxes could be negotiated down, and their workers were happier due to all sorts of improvements in their working conditions. So, look for clusters of mid and large scale corporation office blocks in exurbs. That’s where the action is.
Keep up the good work.
It might be instructive to examine consumer confidence before the last crash.
Learning from history?!? Surely, you jest…
U Michigan sentiment peaked in Jan. 2004 at 103.8. Nearly four years later in Dec. 2007, the economy entered recession with UMich sentiment at 75.5.
https://research.stlouisfed.org/fred2/series/UMCSENT
What, me worry? ;-)
And 96.9 in January 2007.
There are widely differing views on the indexes. For me they reflect only perceptions. If information is withheld from the public then the index means very little as a leading indicator.
From the outer exurbs of the imperial capital there is still plenty of $$$ sloshing about, although not with the same vivid exuberance and animal spirits that led up to 2008. Satan is not yet vanquished.
The local town may be getting new FBI records management complex which will surpass the Second Coming among the local Republicans. God is Great when the Dollars are flowing. Cold cash is how He bestows Blessings. Read this and weep sinners.
Yes, the Beltway is a bright spot, or splotch.
Lambert,
Context is important here, and the key part of the press release is “7-year high”. That takes us all the way back to…. 2007, just as the housing market was in full cool-down mode and and the economy was beginning to roll over.
Normally at this point in a recovery consumer confidence is well above the 100 level (it peaked at 110 in early 2007, nearly 20 points from where we are now). Fact is that while the index itself may have reach some intermediate high, it continues to run well below what would be considered “strong” levels. Consumers definitely do not feel that the economy is robust, likely for many of the reasons you mentioned.
Of course the media spin is to describe the current level without any reference to past reading (whether that’s intentional or laziness I will leave to others to determine), we are left to interpret the data practically in a vaccuum.
Does any other “first world” economy track consumer confidence as closely or avidly as the US?
Yeah that’s great
Tho, this remains my favorite MP skit –economics and otherwise
https://www.youtube.com/watch?v=KbtVaTWs6II
Monty Python- Dennis Moore
The CCI follows the stock market and media’s market-shaped interpretation of ‘times’, good or bad – thus its inclusion as a ‘leading indicator’ in the LEI, even though it’s a trailing indicator of the market.
This can, uncontroversially, be seen over time in graph form, with the occasional big ‘miss’ by one or other Index erased either by its sibling Index, or a later internal ‘revision’. On such occasions, the CCI can move the market substantially up or down, to the potential delight of ‘insiders’. Mostly, though, its ‘value’ is to affirm the market’s prior direction (since 2009, almost always up) and act as foothold for inevitable next step (up).
Here’s a question: how do either of these Indicies, or any other national survey come up with numbers for the majority of people ages 16-30 who have no land-line (listed phone number) along with all those of other ages who have no phone or no land-line for reasons other of thrift or otherwise? What would a survey of the whole real population look like?