Despite Its Flaws, There's Money In Measuring Consumer Confidence

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Despite warnings from Washington about looming budget cuts, Americans seem to be feeling better about the economy. Earlier today, the Conference Board reported that consumer confidence spiked upwards this month. We hear this number and others like it reported all the time and that got us wondering: What does it mean to put a number to the concept of consumer confidence, a number like this month's, 69.6.

We're going to put that question to Adam Davidson from our Planet Money team.

And, Adam, is it 69.6 percent? And if so, percent of what?

ADAM DAVIDSON, BYLINE: Well, this is an index, meaning it's a number that tells you how you're doing compared to a benchmark. And in this case, the benchmark is the average amount of confidence Americans felt in the year 1985. The Conference Board chose that year 'cause it just happened to be a sort of normal year; it wasn't particular great, it wasn't particularly awful. So they say, OK, 1985, that's normal, that's 100.

So if the confidence index is above 100 that means we're feeling better than normal, or at least better than we did in 1985. If the index is below 100, as it is now, that means we're feeling worse than normal, worse than we did in 1985.

CORNISH: So how bad is today's number? Or how good is it relative to where it's been recently?

DAVIDSON: Well, that's the key point. It's pretty bad relative to all of history. It's pretty good relative to recent history. We're just about 70 now, which means we're, you know, well below how we felt in 1985 but we're way, way, way above where we were, say, in 2009 when we were down around 20.

It's been bouncing around pretty wildly. I mean, it went up 10 points in February from the previous month. It's been into the 70s and down below into the 50s over the last few months. I don't think we need a fancy index to tell us the American people are feeling worse than normal and not quite sure exactly how much worse than normal we should feel.

CORNISH: So does it matter how confident we feel? I mean, who actually looks at this number?

DAVIDSON: Well, the idea of confidence, of the emotions of the population, is an incredibly important one in economics. John Maynard Keynes called it animal spirit. And if people are feeling generally good about the future, they're more likely to spend money, to start new companies; companies are more likely to hire people, make investments.

So if people are feeling good that's generally good news for the economy, unless they're feeling too good, they're feeling irrationally exuberant. That can cause bubbles. That's what we saw in the housing bubble, for example. So we really would love to know how people are feeling. That's important to governments, to investors, to us journalists.

The problem is measuring it. We don't yet have a really perfect way of measuring how people are feeling. The Conference Board, like a whole bunch of others, surveys people. They survey around 3,000 Americans each month.

But again, how are you feeling, Audie? Are you feeling 37.3? Are you feeling 96.1? How are you feeling compared to 1985? I mean, these are - it's subjective, squishy numbers.

CORNISH: So why do it? I mean, why measure confidence if it can't be measured all that well?

DAVIDSON: Well, the simple matter is there's money in it. There is money in selling these indices or using these indices to sort of market yourselves. The Conference Board has a lot of competition. Gallup has the daily U.S. Mood Index. The University of Michigan measures something they call consumer sentiment. We have from The Washington Post and ABC News, the consumer comfort Index. These are great branding opportunities. The Conference Board makes money selling reports.

So there's a lot of money in it because people really, really do want to know, even if each of these indices has its flaws.

CORNISH: That's Adam Davidson of NPR's Planet Money team. Adam, thank you.

DAVIDSON: Thank you, Audie. Transcript provided by NPR, Copyright NPR.

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