What consumer confidence tells us about the economy
Consumer confidence, as its name implies, measures how optimistic people are regarding the economic future of their country and thus is a determining factor of the population’s decision on whether to spend or save money at the current moment. People tend to distribute more of their income and savings to consumption if they perceive the economy is booming, and they become equally risk averse when confronted with uncertainty of their future well-being.
In the United States, consumption comprises roughly 70 percent of the nation’s Gross National Product every year, which indisputably makes it stand out as a single economic indicator always under the careful scrutiny of policy makers and researchers in order to make accurate predictions and to take counter-cyclical measures in a timely manner.
To understand the implications of the consumer confidence index is to understand the ups and downs of the nation’s economic activities in a broader picture. According to one study of consumer confidence conducted by the University of Michigan, consumer confidence in the U.S. fluctuated relatively steadily around 100.00 from 2018 to 2020 and plummeted to a point that was almost half of its previous capacity after the coronavirus outbreak.
One could easily conclude from the trend that the economy shrunk dramatically. With a huge amount of the workforce laid off and numerous economic activities suspended due to lockdown and quarantine policies, people faced great pressure to maintain their quality of life prior to the pandemic.
To take one step closer to the true meaning of consumer confidence, it would also be insightful to take a look at China, the world’s second largest economy. Two years ago, Chinese consumers rebounded quickly from the pandemic, and life went back to normal in China in less than a year since the virus was first detected.
It wasn’t until this April that the country’s Covid-zero policy dismayed its citizens to such an extent that the consumer confidence dropped from around 120.0 to 80.0 in just two months.
Since the beginning of this year, to contain the infectious Omicron variant of the coronavirus, it has become common practice in big cities to take more stringent measures than ever, such as PCR testing every 48 hours and lockdown of major cities or different neighborhoods within the city.
In a city like Shanghai that could otherwise be as bustling and economically active as any other metropolis around the world, there are long lines in front of testing booths with people doing nothing but waiting. Businesses that could have reopened chose to shut their doors, because they did not want to be held accountable for the local outbreak.
Consumer confidence is all about consumer sentiment: How they feel about the government and leaders, whether they view current policies as constructive or detrimental to their own financial situation, and what they believe is the future of their nation. In the case of China, it illustrates that the virus is not the only factor that could dispirit people, not to mention one important notion in economics: Time is money — every minute that could have been spent on yielding productivity is a waste to the economy.
Looking at the more recent data in the U.S., Americans actually perceive the economy as doing better during the first half of 2022, reflected in their growing willingness to consume today.
However, with inflation becoming a greater concern as people see gasoline prices surging, people get further constrained from their purchasing. To reverse this trend, the Federal Reserve has raised interest rates even at the risk of entering a recession, and consumer confidence finally rebounded in August after three straight monthly declines.
It may sound paradoxical that governments are always striving to find a midpoint between boom and bust and never want to reach the extremist end. But that is all economics is about: stability. Policy makers do want to see growth, but only if it is a steady one.
