How Can Consumer Confidence Surveys Be Taken As Seriously As They Are?

Filed under Personal Finance {18 comments}

For some reason, the idea popped into my head to look into how the consumer sentiment is figured. You know, those surveys done by the University of Michigan and The Conference Board which tell us what consumers feel about their situations and the economy, and which ultimately turns the markets one way or the other based upon the results. The last part is what bothers me. The fact that a simple survey can affect so many is fairly unsettling to me, and I was curious as to just who these people were that have the power to change the direction of our investments. The answer almost knocked me off of my chair.

I thought that maybe there was some scientific approach to the survey, and that the sample set would be representative of the nation as a whole, but the reality was much different. The University of Michigan and Reuters partner to publish one of the most influential pieces of economic data. The interesting part is that the procedure is to select a minimum of 500 households which will answer 50 questions designed around financial matters, and which will influence millions of people’s immediate futures. These aren’t specially designated experts or scholars, but random households. There is apparently no screening process for eligibility, so there is no way to know if the respondents will even be financially literate, or have the ability to process the information in a logical and rational manner. The Conference Board is a little broader in that it selects 5,000 households for inclusion in its survey, but that is still too small a sample to attempt to project it as snapshot of the nation.

The most interesting thing that I discovered was on the survey information section of the University of Michigan page under the description heading. A full explanation of the survey was provided, as was a series of charts comparing responses with actual events. Of course if you take the results of the survey and plaster the information on every single financial news outlet, then the rest of the people will react in a similar fashion. That is the way the economy and media works today: if you publish the information, it will be held as gospel. The problem is that sentiment is based on emotion. Emotion tends to be illogical, and therefore is the enemy of finances which are ideally supposed to be rational, cold, hard facts and figures. Once the emotions of a select few enter the picture, it essentially corrupts the data, and makes it way to the masses, thereby corrupting them as well and their actions dictate what direction the economy will go.

In fact, I will go so far as to say that these surveys do not present very reliable or fundamentally sound guidance at all. It makes me wonder why experienced and educated professional would even use this type of data at all. I would liken it to asking random people on the street about a medical condition: you don’t know what their backgrounds are to be able to answer the question but you still take their (possibly) uneducated or uninformed opinions under advisement. Especially in tough times it is imperative to use fundamentally sound data and guidance, which these types of surveys obviously cannot provide.

The funny thing is that these days whenever you turn on the television or read a periodical, the common advice is to be extremely cautious of where you get financial advice from, yet these types of unscreened, random surveys are not only allowed to have a major impact upon the economy each month when they are released, but are heavily anticipated and trusted.

What’s your take? Do you trust the emotions and (possibly lack of) economic understanding of random people to determine the direction of our economy?

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Article by Eric J. Nisall

Former NY'er, accountant & business consultant, founder of GreenBridge Advisors. Blogging about personal financial, small business topics, and other fun topics at DollarVersity. Fan of the NHL and everything hockey! Follow me on Twiter, Facebook, and on Google+

Eric J. Nisall tagged this post with: Consumer Interest, economy, Investing Read 155 articles by Eric J. Nisall

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http://liverealnow.net Jason@LiveRealNow
Most consumers know almost nothing about how the economy works. Their idea of positive signals is scary.

http://www.dollarversity.com Eric J. Nisall – DollarVersity
Yeah, tell me about it. I wouldn’t trust most people to signal a turn properly, let alone the economy!

http://www.creditcardscanada.ca Credit Cards Canada
The whole concept of “consumer confidence” is not to find out what the experts think, but what the consumers think. What do the know-it-nots think of the economy and how are they likely to act/react in the days (or minutes?) ahead? Of course, as soon as everybody knows what everybody else is thinking, everybody follows suit and takes it for gospel truth. It is so high school … but it is the way the world works.

http://www.dollarversity.com Eric J. Nisall – DollarVersity
I completely understand the concept of getting consumer input, but I’m questioning the validity of this process. I just can’t get past the fact that a leading economic indicator is left in the hands of random numbers to be called, and the god-knows-what financial attitudes they have.

Miss T @ Prairie Eco-Thrifter
It is a sad state of affairs how little the masses know about these kinds of things. It really is a small niche of people who have a good understanding of the economy, what it is, and how their actions can impact it. There is a definite need for education of the public on this matter.

http://www.dollarversity.com Eric J. Nisall – DollarVersity
You know it! But, since we can’t educate everyone, my vote is to stop doing this stupid survey and letting those people effect change in the markets based on seemingly random information.

Hunter
It’s a little scary to see how so little can sway the markets. I wonder how survey results actually correlate to economic performance? If the historical relationship is fairly consistent I would be willing to assign more weight to the survey.

Anonymous
That is my problem with those surveys. They can be fixed to go anyway you want them to go

http://www.dollarversity.com Eric J. Nisall – DollarVersity
I don’t even worry about them being fixed. Did you see that piece over the weekend about senate committee members being excluded from insider trading rules? Now, that would bother me. This situation just bothers me because of the small sample sizes and the people they are asking to evaluate something they may be incapable of understanding.

http://twitter.com/moneyqanda Money Q&A
A sample size of 5,000 households is more than large enough sample size to achieve a representative sample of the entire US population. 5,000 households provides a 99% confidence level and a margin of error of less than the standard +/- 5%. I understand your sentiment in the blog post, but your criticism of the statistical procedures used by these institutions are unfounded. 500 is pushing it, but you can be 95% confident of your results with that sample.

http://www.dollarversity.com Eric J. Nisall – DollarVersity
I appreciate your view as to the statistical integrity, Hank. My issue isn’t so much with the accuracy, but rather that the sample size doesn’t even come close to a decent number. According to the Census Bureau the period from 2005-2009 the average number of households in the US was 112.6 million, so even taking a sample size of 5,000 households represents a small fraction of 1% of them all. To me, that’s akin to asking 5 people NYC what they think and claim that it is a fair representation of how NYers feel. I simply do not feel comfortable with such a low ratio being used as such an important and influential economic tool.

http://afford-anything.com Paula Pant
The thing that surveys of households often overlooks is that sometimes, people don’t KNOW what they like or want. Apple / Steve Jobs proved that — he gave the public what they didn’t know they wanted.

http://twitter.com/prairieecothrif Miss T
I agree. In this day and age there are so many different options available to us that knowing what we want becomes more and more difficult. Have you ever read the Jam experiment? Google it- it is really interesting. Basically it proved that the more options people have the less happy they are.
http://www.dollarversity.com Eric J. Nisall – DollarVersity
Absolutely. It’s the reason why marketing firms and ad agencies make so much money. It’s their jobs to tell the consumers what the want, and it’s that weakness I am worried about when it comes to this situation.

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http://moneyanxiety.com/ Dr. Dan Geller
No Confidence in Consumer Confidence Surveys
Conflicting results by the two major consumer confidence indices shows that consumer surveys are not a reliable economic indicator or predictor.
The latest analysis from the Money Anxiety Index (moneyanxiety.com) shows conflicting results by the two major consumer confidence surveys. January’s Consumer Sentiment index, produced by Thompson Reuters/University of Michigan, reported an increase of 5.1 points from December, were as the Consumer Confidence Index, produced by the Conference Board, reported a decline of 3.7 points for the same month. Clearly, consumers’ confidence in the economy can not be increasing and decreasing at the same time in the same place, which points to a deficiency in the concept of subjective surveys.

The conflicting results in the January’s indices between the Thompson Reuters/University of Michigan Consumer Sentiment index, and The Conference Board Consumer Confidence Index, are rooted in their reliance on what consumers are saying rather on what consumers are doing, such as spending and savings levels. Such discrepancy occurs because people do not always say what they do, nor do they always do what they say. Hence, consumer confidence indices relaying on consumer responses are subjective, and are not as reliable as the Money Anxiety Index, which is completely objective because it is based only on real economic indicators.

The methodology both “consumer confidence” incises use is fairly similar with a few exceptions. Both surveys include five core questions regarding current and future economic conditions, and both use a relative weight to each of the questions. The main differences between the two surveys is that the Conference Board uses a mail survey to about 5,000 households (although only about 3,000 respond), were as the Thompson Reuters/University of Michigan survey is done by phone to about 500 households.

“Surprisingly, many economists and analysts use such subjective indices as predictor to economic activities,” said Dan Geller, Ph.D. Chief Research Officer at Money Anxiety Index, “In reality, it should be the other way around – use economic indicators to gauge consumer financial confidence much like the Money Anxiety Index.”