Why do we measure consumer confidence and what does it tell us?

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Douglas Broom, Senior Writer, Formative Content

• Can consumer confidence surveys really help predict economic trends?
• Governments, businesses and banks rely on them.
• But some people believe they may be measuring the wrong things.

How do you feel about your personal financial situation? Do you think the economy will improve or get worse? It’s not a trick question, but a way of measuring consumer confidence.

The first consumer confidence index (CCI) was established in the United States in 1967 as the post-World War II boom began to falter. Economists, manufacturers, retailers, banks and the government wanted to know if the prevailing public mood would last.

Since then, many nations have created their own indices. Global market research and consulting firm Ipsos, a World Economic Forum partner organization, compiles its own worldwide CCI using 24 countries’ national indices.

Why measure consumer confidence?

So why create a CCI and what does it tell us? The Organisation for Economic Co-operation and Development (OECD) points out that CCIs not only give an indication of how much households think they will be able to spend in the near future, but it’s also a measure of their ability to build up savings.

Indexes show how consumers expect their financial situation to change, whether they fear unemployment and how they feel about the general economic situation in their home country and across the world.

A falling index indicates pessimism about future developments in the economy, which can result in a tendency to save more and consume less, says the OECD. CCIs are a key part of government and business decision-making.

It’s hardly surprising that, thanks to COVID-19 and war in Europe, recent consumer confidence has been volatile. The OECD says it’s been on a rollercoaster ride since the pandemic hit.

Due to COVID-19 and war in Europe, recent consumer confidence has been volatile. Image: OECD.

The September 2022 Forum’s Chief Economists Outlook underlined the reasons for consumer pessimism: “Real wages and consumer confidence are in freefall, adding further headwinds to growth and raising the prospect of social unrest,” it said.

European Central Bank’s own research showed consumers were expecting inflation to remain high, the report added, with EU citizens expecting it to still be around 3% by 2025 and even to rise to 5% in the longer term.

A changing outlook

In order to help non-specialists see how consumer confidence changes over time, the OECD has produced a new online tool that shows just that. The OECD Consumer Barometer also shows how fast sentiment can change.

For example, in June 2022, people in Denmark and Sweden were moderately pessimistic about the economic future, scoring minus 0.3. But by November 2022 they, together with the citizens of Italy, had switched to being very optimistic with a score of plus 1.4.

It’s not clear from the OECD data what changed their minds, but some have questioned not just the accuracy but also the usefulness of consumer confidence indexes.

Are consumer confidence surveys becoming irrelevant?

“The customer is always right,” is a phrase popularized by early 20th-century retailers. But does the idea hold true for consumer confidence surveys? Are they influencing government and business or is it the other way around?

One economist, Professor Sydney C Ludvigson of New York University, set out to answer the question and concluded that, although they did contain some useful predictions, much of what they showed reflected what people were being told by popular economic indicators.

“There is some evidence that consumer confidence surveys reflect expectations of income and non-stock market wealth growth, but evidence on the connection between these surveys and precautionary saving motives is mixed,” she added.

Is there a better alternative?

Some have called for a more radical change to the very nature of confidence surveys. Writing for the World Economic Forum’s Agenda, two members of the Forum’s Young Global Leaders argued consumer confidence was an irrelevant measure in today’s world.

They said that, in a world threatened by climate change and riven by inequality, an index that measured people’s hopes of consuming ever more things was inappropriate. They proposed a Citizen Confidence Index to measure how much people feel in control of their lives.

“This would ask people not just how confident they are that they can consume, but that they can shape their context and find agency, purpose, support from their community and an intent to participate meaningfully in the world,” they said.