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It is no surprise that consumer confidence has cratered
since COVID-19. But the extent and implications of such an unprecedented decline
have just been released by the Conference Board through their latest Consumer
Confidence Study.
According to Lynn Franco, the Conference Board’s Senior
Director of Economic Indicators, this study has been around since the late
1960s. “It is considered an economic barometer of consumers’ health rating for
the economy,” she explained.
Five Simple Questions and Two Revealing
Indices
The study
consists of five questions posed to consumers including their assessment of current
business conditions and current employment conditions, “which are rolled up
into what we call the present situation index,” she explained, “Then we ask
them their expectations six months out regarding business conditions,
employment and income. Those three questions are rolled up into what we call an
expectations index. Consumer confidence is just an average of the five
questions.”
In addition
to these Consumer Confidence components, the study also asks questions
regarding purchasing propensities which are not factored into the composition
of the index. Examples include intent to purchase an auto, home, major
appliances. “We also ask them about their inflation expectations and stock
prices and vacation intentions,” she added.
But it is
the Consumer Confidence Index that is the major metric, holding outsized importance
in ascertaining the temperature of the economy. How are consumers assessing the
present situation as well as their expectations? Here is where we see trouble
brewing.
A Bumpy Economic Road Ahead
March to
April, the Consumer Confidence, “has declined by nearly -32 points which is the largest month to month decline we’ve
seen since we have been doing the study since the 1960s,” she warned. “That is
a rather significant decline obviously brought on by COVID-19.” But, she added,
“when you peel away the layers of the onion and compare how consumers rate the
present versus their expectations, it’s a different story.”
“Consumer
attitudes on present business employment conditions saw a -90 point decline in that
index,” plummeting from pre-pandemic levels as the economy ground to a halt. “Expectations,
however, went up a little bit which was driven by an improved outlook for
business conditions and employment,” as stay-at-home restrictions are eased and
as states reopen the economy. “It gives consumers a glimmer of hope,” she
noted. But, she cautioned, “What’s interesting is that the income expectations question
was not as favorable as the other two. In fact we have consumers quite pessimistic
about their financial prospects in the next six months. The pessimists out-number
the optimists,” which can have implications for consumer spending as the
recovery takes hold. “Consumer Confidence is now in the 80s which is a
recession level reading,” she stated.
Overall
purchase intent such as autos has declined precipitously March to April. There
is also, “a softening in home purchasing intentions, reflective in the type of
housing data we are seeing now,” declines in major appliances purchasing as
well as steep declines in vacation intentions. In sum, this indicates that
consumers are delaying big ticketing purchasing for the time being and being
cautious in their overall spending.
Year to Year Comparisons
The drops in
index levels year to year are, “unprecedented in terms of month to month declines,”
she noted, although, “we have seen consumer confidence much weaker during the 2008
Great Recession.” But this may be because the impact of the pandemic is
currently at only a few weeks while the Great Recession lasted for over a year.
April
2019 April 2020
Consumer
Confidence Index 129.2 86.9
Present
Situation Index 169.0 76.4
Expectations
Index 102.7 93.8
The Implications of Weak Consumer Confidence
The biggest
implication of weak consumer confidence levels, according to Franco, “is the
unknown. We haven’t seen all of the economic consequences of COVID-19 played
out yet.” So she cautions making any predictions about a continuing upward
trend in consumer expectations. “This could be a very bumpy ride for consumers,
especially if, as many say, there is a second wave in the fall.” In addition,
Franco advises that we, “keep our eye on income expectations because that will
really determine whether or not consumers are going to be willing to spend or
if we are going to see, as we did coming out of the Great Recession, a spike in
the savings rate,” where consumers became much more fiscally conservative. “That still has to play out.”
Is there a
light at the end of the tunnel? Franco was introspective. “It’s going to be as
the economy goes, she explained, and it will vary by category depending on
whether there is a continuing need for social distancing such as with
Hospitality. “It runs the spectrum. We need to find a new normal.” To that end, “we need to keep an eye on consumer
expectations to see if and when consumers become more willing to spend. Unlike
other recessions where consumers were driven by the economy and financial
factors, this is a health crisis with a lingering fear factor… and how we will overcome
that fear.”
As far as
the implications for the 2020 elections, wait until September when consumer
confidence levels better indicate election outcomes….
This article first appeared in www.MediaVillage.com
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