Wednesday, December 31, 2008
Yesterday the Conference Board released its December 2008 consumer confidence survey index (CCS), which fell 14.9% to 38, a record low. Alternatively, the preliminary December University of Michigan consumer sentiment survey (MCSS) improved 2% to 59.1.
The CCS and MCSS tell slightly different stories based on current and expected inflation rates. I can only conclude that there is an unmeasured gloominess in the two indeces. The CCS respondents are slightly less gloomy about the economy than are the MCSS respondents; they deem the recent drop in commodity and retail prices to be short-lived.
The CCS indicates that consumers are worried about the current state of th economy:
- Current business conditions worsened, with a larger number of consumers saying conditions are bad and a fewer number of consumers saying that they are good.
- Current employment conditions tumbled, with jobs becoming harder to get and less plentiful.
As the chart illustrates, the respondents of the MCSS phone survey were slightly less gloomy than the respondents of the CCS. It is not uncommon for the surveys to tell a slightly different story, but with a 0.89 correlation, they generally move in sync.
Rock-bottom pricing drove the positive MCSS current economic condition responses and boosted inflation expectation (see below), but had negligible effects on the CCS responses. These surveys can sometimes pick up price effects, but in spite of the MCSS' small December improvement, consumers are rightly nervous both now and going forward. I expect that the MCSS will catch up with the CCS, as inflation deceleration slows.
The consumer confidence survey also gives a slew of information about consumer expectations over labor, business climate, and prices.
Consumers expect the labor market to worsen slightly
Consumers expect business conditions to corrode as well
Unlike the current economic conditions index, the MCSS confirms bleak labor market and business conditions going forward. The MCSS reported that 70% of the survey respondents expect the unemployment rate to rise in 2009, and 75% expect the recession to continue throughout 2009.
However, the MCSS and CCS veered miles from each other regarding inflation expectations.
Current price declines have become embedded in the MCSS respondents' inflation expectations only. The CCS consumers expect a 5.8% inflation rate in 2009, while the MCSS consumers expect a 1.7% inflation rate. It is not uncommon for the inflation expectations responses to differ - the inflation correlation betwee the CCS and the MCSS, 0.72, is smaller than that between the overall indeces, 0.89 - but a 4.1% differential is quite substantial.
I appears that either the CCS respondents (a mail in survey rather than the MCSS’ phone survey) are avoiding gas pumps and malls, or are less convinced about the persistence of commodity price declines. Neither the CCSs coincident survey nor its inflation expectations survey are dominantly affected by the recent drop in prices.
The CCS respondents are less gloomy than the MCSS respondents, where the precipitous drop in energy and retail prices is expected to be short lived. The coincident indicators nor the inflation expectations index embed the drop in commodity prices, driven by the global recession.