Is consumer confidence a good predictor of economic performance?
Since August 2022, Canadian Consumer confidence has crumbled. Confidence in real estate prices has dropped even further. 2 of 10 Canadians don’t believe home prices will be higher in six months.
Is confidence today a good predictor of future economic performance? Can it help predict future home values?
Consumer confidence is a key economic indicator that measures the level of optimism or pessimism among consumers regarding their financial situation and the overall economy. It is often used as a predictor of future economic performance, as consumer spending accounts for a significant portion of economic activity. In this post, we will explore the relationship between consumer confidence and economic performance, and examine its usefulness as a predictor of future economic trends.
What is Consumer Confidence? Consumer confidence is a subjective measure that reflects the level of optimism or pessimism among consumers regarding their financial situation and the overall economy. The Nanos Confidence Index is one of the most widely used measures of consumer confidence in Canada. It is based on a monthly survey of 1,000 households, and measures consumers' attitudes toward the economy, employment, income, and their future spending plans.
Consumer Confidence as a Predictor
Consumer confidence is closely linked to economic performance, as consumer spending accounts for a significant portion of economic activity. When consumers are confident, they are more likely to spend money on goods and services, which can boost economic growth. Conversely, when consumer confidence is low, consumers may cut back on spending, leading to a slowdown in economic activity.
The U.S. tracks consumer confidence as well. According to a Federal Reserve Bank of St. Louis study, consumer confidence has a statistically significant relationship with key economic indicators, including real economic growth, employment, and retail sales. The study found that consumer confidence can be used to predict future economic trends but cautioned that it should be considered alongside other economic indicators.
Limitations of Consumer Confidence
While consumer confidence is a useful economic indicator, it has limitations as a predictor of economic performance. Consumer confidence can be influenced by a variety of factors, including current economic conditions, political events, and media coverage. It is also possible for consumers to be overly optimistic or pessimistic, leading to swings in confidence that may not accurately reflect the underlying economic fundamentals.
Even looking back at the past year, confidence in real estate started dropping only two months before prices started dropping. If we assume that a purchase talked roughly 2 months to close then confidence is a better indicator of what is happening now than it is an indication of what will happen in the future.
Summary
Consumer confidence is a valuable economic indicator that can provide insight into the overall state of the economy and consumer behaviour. While it can be used to predict future economic trends, it should be considered alongside other economic indicators and factors. By understanding the role of consumer confidence in predicting economic performance, we can better understand the factors that drive economic growth and make more informed decisions.
Sources:
The Conference Board: https://www.conference-board.org/topics/consumer-confidence
Federal Reserve Bank of St. Louis: https://www.stlouisfed.org/publications/regional-economist/third-quarter-2002/consumer-confidence-and-economic-performance
Investopedia: https://www.investopedia.com/terms/c/consumer-confidence.asp
