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Ask Dave

What Is Consumer Confidence?

Grace asks what "consumer confidence" is when the media says it's plunging. Dave explains what this means.

QUESTION: Grace on Twitter asks what “consumer confidence” is when the media says it’s plunging. Dave explains what this means.

ANSWER: Truthfully, they do surveys that ask a series of questions that indicate whether the consumer is confident enough in the economy to go and spend. When the consumer is feeling that they don’t have any confidence, generally speaking in America, that means they’re not going to run out there and go deeply in debt. It means they’re not going to run out there and buy stuff they can’t afford with money they don’t have to impress people they don’t really like.

When you hear the phrase “consumer confidence has gone down” in a credit card–based economy, in an economy based on goobers spending more money than they have—and I’m not talking about Congress, I’m talking about you—in that situation, when you hear consumer confidence going down, what you hear is that the economy is going to slow down because consumer spending is going to slow down because the consumer is freaked out like a deer in the headlights, and they’re not spending money. They don’t spend money. They hoard money when they’re afraid—when they don’t have confidence. You see a slowdown in spending, thus a slowdown in the economy. Because if you don’t go buy a washer and dryer, some guy at the washer and dryer factory doesn’t have a job to make washers and dryers. Then he doesn’t have any money to spend at the restaurant down the street, and that restaurant goes out of business. You get this ripple effect through the economy when there’s no spending or less spending. I’m not saying you should go spend. I’m just saying that’s why the economists and the news people are always so worried or twisted up about consumer confidence.

Here’s what’s interesting about all of that, though. Measuring someone’s confidence statistically with a formula is a wee bit subjective. That’s like saying we have a measure to measure how much you love. You’re a 10 on the love scale. You’re a seven on the love scale. Who gets to decide that? How do you gauge confidence like that statistically, to where you can then measure it accurately month in and month out and report it as a news story as if it is somehow relevant to our world? I challenge that. I’m not a big fan of the “consumer confidence index” because I think the concept of measuring something that nebulous with a mathematical formula is very tough to do accurately month in and month out. Generally speaking, can you say that when the economy is slow people aren’t as confident as when the economy is booming? Yeah, I think you can figure that one out. But to say that consumer confidence has dropped by 1.2%, how did you measure that in a way that I’m going to believe the scientific theory behind your formula? I don’t think so. The problem to me is I had a few statistics classes.

Can we say that consumer confidence does have an impact on the economy? Yes, we can say that. Can we measure that accurately? I don’t believe so. I disagree with the premise. But it is thrown around as if it’s a freaking scientific fact.