Confident in Confidence Numbers?

12/14/2009 11:35 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

How important is confidence? And can you measure it? It certainly seems to be important, in the sense that rising confidence begets more confidence. And it seems to be important that we measure it. 

That’s probably why we have not one, but two measures of consumer confidence: the monthly University of Michigan Consumer Sentiment survey, and a slightly different measure done monthly by the Conference Board, known as the Consumer Confidence Index.

Last Friday, the University of Michigan measure rose from 67.4 in November to 73.4 in December—a two-year high (1964=100). Surely that was good news. But put it in perspective. As measured by the U of M survey, confidence remains well below the historic average of 86.6. So is the glass half full—or half empty?

Similarly, the Conference Board’s latest survey, released on November 24th, showed the index at 49.5 (1985=100), up from 48.7 in October. But that’s way, way down from its peak at well over 140 in 2002. Again, half full—or half empty? 

The surveys both ask questions not only about current views, but about consumers’ expectations for the future. In last Friday’s U of M release, the sentiment about current conditions was much higher than analysts had been predicting, with the “current conditions” component jumping from 68.8 to 79.1. But the “future expectations” component of the Michigan survey rose only slightly, from 66.5 to 69.7.

Okay, enough with the numbers. But can you really measure, and accurately report, consumer confidence?  

The Conference Board surveys 5,000 households every month—asking five questions about current and expected business and employment conditions, as well as expectations for household income. The University of Michigan survey conducts 500 telephone interviews each month, and asks 50 questions.

Far be it for me to question the economists who publish this data, and the business judgments that are made based on this data. I confess, I never took a course in statistics. But what do you think is the value of these reports? Do they report on confidence—or do they inspire confidence, or the lack thereof?

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