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.”
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?
That said, let’s look at the latest “Consumer Confidence” results. 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.
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?
 “Flat” is British for “apartment.”
 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.
 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?”