How consumers see their own situation vs. the larger economic picture help determine the performance of the major consumer economic indexes.
Eric Espeseth, Principal Credit Analyst
Throughout the current economic expansion, the importance of U.S. consumer spending cannot be overstated. According to the Federal Reserve, personal consumption accounts for nearly 70% of U.S. GDP. Several major economic indicators help economists gauge the health of the U.S. consumer and its outlook on the economy. These include two leading consumer surveys - the University of Michigan's Consumer Sentiment Index and the Conference Board's Consumer Confidence Index.
Both indexes are administered monthly to a broad swath of the U.S. population and each index asks five core questions to determine consumer attitudes and expectations toward the U.S. economy. These core questions generally revolve around consumer perceptions of personal finances, business and employment conditions and buying conditions. They also consider current conditions and future expectations.
The two indexes are often used interchangeably and tend to track each other quite closely over time. It is important, however, to note that while the two surveys are similar in their approach to assessing consumer perspectives on the U.S. economy, there are subtle differences between them - notably the focus of the survey questions.
The Consumer Confidence questions place a greater emphasis on employment and labor market conditions while the Consumer Sentiment survey emphasizes individual household finances. This drives the iepression Consumer Confidence more generally reflects consumer feelings towards the overall economy while Consumer Sentiment reflects consumer perceptions of their own personal circumstances.
Other differences include the period used for future expectations. Consumer Confidence uses a six-month period compared to Consumer Sentiment's one- and five-year expectation outlooks. Additionally, the Consumer Sentiment survey polls 40% repeat respondents while the Consumer Confidence survey engages new respondent pools each month.
These nuances can lead to divergent trends between the two indexes over short periods of time, as is currently occurring. We believe the current divergence is being driven by consumer views on the present environment. Strong employment conditions - including the lowest unemployment rate in decades - along with all-time highs in equity markets are creating a positive view of the overall economy and are having an increased impact on Consumer Confidence, which remains near record highs. We feel modest wage growth, growing political dysfunction and uncertainty over the impact of the trade tariffs may be weighing on how consumers view their own personal financial situations and, thus, causing the divergence in the indexes over the past two years.
Both indexes are important factors in assessing the overall health and trajectory of the U.S. consumer's economic contributions, but we tend to view the University of Michigan Consumer Sentiment Index as a better leading indicator of future consumer spending given its greater focus on personal financial situations. Changes in employment and labor markets - a larger factor in the Conference Board's Consumer Confidence Index - are often viewed as lagging indicators as they tend to happen after financial conditions and real activity have turned.
St. Louis Fed, Shares of Gross Domestic Product: Personal Consumption Expenditures, fred.stlouisfed.org
Consumer Confidence Board, Consumer Confidence Survey Technical Note, February 2011
Investopedia, How to Read the Michigan Consumer Sentiment Index, Investopedia.com
Investopedia, Understanding the Consumer Confidence Index, Investopedia.com