Consumer confidence indexes help move stock markets, influence corporate decisions and alter governments' economic outlooks. But a study says they're essentially useless for forecasting Americans' spending patterns.
The two closely tracked indexes - from the University of Michigan and the Conference Board - may reveal the mood of Americans when they are surveyed, but they don't predict whether people will spend more or less, said Dean Croushore, an economics professor at the University of Richmond.
Croushore said that when he began his study, he believed the confidence readings had value and that his analysis might show they were more insightful than perceived.
Croushore said the Michigan index performed worse in his unpublished study. In the late 1990s, for example, consumer spending increased, but the Michigan readings had showed confidence at a rather flat level while the Conference Board index had risen.
Michigan's consumer surveys were created after World War II as a way of measuring consumers' optimism or pessimism. Each survey now includes about 50 questions that deal with everything from refrigerator purchases to inflation. Consumers are asked a number of follow-up questions, with a goal of understanding why they make certain financial decisions.
The sentiment index is based on the answers to five questions in the survey, including consumers' views of their financial situations currently and in the future, their expectations about employment, and whether it's a good time to buy a major household appliance.
A minimum of 500 telephone interviews are conducted each month, and a score is calculated based on the responses.
The Conference Board's index, which dates to the 1960s, works in similar fashion. Its monthly survey is mailed to 5,000 U.S. households, with a response rate of 70 percent.
Over time, both indexes have grown in importance, and they are now widely cited by economists, government officials, investors and the media. Both have the ability to send the stock and bond markets rising or falling, depending on whether the indexes met investors expectations.
On Jan. 25, for example, Wall Street analysts said the release of the Conference Board's index helped propel the Dow Jones industrial average up nearly 93 points, its best day so far in 2005.
Richard T. Curtin, director of the Michigan surveys, said it's more telling to look at consumers' responses to his survey's specific questions rather than the index itself. That's because over the decades, Americans' spending decisions have come to be based on an increasing number of factors, including expectations about interest rates and asset values, he said.
"So the details are much more important than the overall number," Curtin said
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