As we approach the Christmas season, it’s a good idea to look in on consumers. They are the driving force in our economy, representing approximately two-thirds of all activity. Their mood in November and December often makes or breaks the fortunes of retailers for the entire year.
We get two indirect peeks at buyers’ spirits each month. Both the University of Michigan and the Conference Board provide us with measures of consumer confidence (or sentiment). We get more direct views from other data related to retail sales, housing activity, and consumer spending. As a general precept, you would think the attitudes and actions would be highly correlated. In reality, while they are certainly related, their movements do not coincide nearly as much as other aspects of the economy. More importantly, these sentiment measures are no better than dozens of variables (and worse than some) in foretelling future patterns in the economy. What consumers do is critical; predicting it accurately is quite another matter.
One of the reasons that surveys of our perceptions don’t always match our purchasing activity is a simple case of timing. We saw this phenomenon graphically illustrated over the past weeks. The Conference Board’s Index of Consumer Sentiment plummeted from 93 to 79 (against an arbitrary benchmark of 100), the lowest level in many years. Wall Street immediately wrote off any thought of strength in Christmas shopping and major indices dutifully fell precipitously. Fortunately, it thought better of this notion as the day wore on, and essentially reversed the losses by the end of the day. The market, which can’t resist the temptation to overreact to these things (and a lot of other things these days), finally got it right later in the day.
The paradox that we may feel bad and act good (or vice versa) may well be the result of the fact that (1) the surveys are collected in a period prior to the time of their release, and (2) we tend to base our expectations on very recent information (a conclusion from modern psychology that is informative to economics, sociology, political science, and several other disciplines). At the time the survey was taken, the stock market was in a seemingly endless free fall, the talk of war with Iraq was at its peak, a dock strike on the West Coast threatened to stall the fledgling economic recovery and delay holiday deliveries, and we were obsessed with sniper attackers who were threatening the Washington, DC area and stirring our collective anxiety in a post-9/11 world.
By the release date, the universe seemed far different. Corporate earnings had been generally positive, and the market was 1,000 points higher; the war issue remained unresolved but was receiving less general media coverage; ships were being unloaded as the supply chain was being restored; and the alleged snipers had been apprehended. Thus, while I don’t want to totally dismiss this report, its ability to tell us anything about “real” consumer feelings as we knock at the door of the holiday season is highly suspect. In fact, the merciful end to an almost endless election cycle will eliminate still another aspect of uncertainty in the minds of consumers, with the nature of the outcome being far less important than having one.
That is not to say Christmas of 2002 will go down as one of bountiful prosperity and spending run amok. Our spirits understandably remain somewhat in check. Nonetheless, the dismal sentiment index value must be placed in proper context. It is likely that it will be a season of modest growth in consumer spending; not enough to get retailers too excited, but more than ample to build momentum into 2003. Whatever happens, don’t lose sight of the opportunity to enjoy family, friends, and peaceful festivities.