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NEW YORK (
) -- Economists, both Keynesian and other in bent, have at least one area of commonality: The belief there's an aspect of economics that numerical studies or analysis of plans and policies can't explain. It's the behavioral aspect that drives consumers to spend and businesses to take risk: in Keynesian lingo, "animal spirits." In classical econo-speak, "confidence."
We entirely agree with the theoretical construct that mathematics can't fully capture all aspects of economics -- and this is one category where that applies. But still, some folks seek to actually quantify confidence.
Whatever you choose to call it, universities and business organizations have for decades attempted to quantify this phenomenon through surveys and the like. There's the University of Michigan survey. There's the Conference Board's. And there's a smattering of others, fully global in their reach, all an attempt to look inside the guts of consumers and figure out how hopped up they are to spend.
In their latest
U.S. consumer confidence survey, the Conference Board found consumers are glum. "Confidence" fell to a two-year low, registering a reading similar to that in March 2009 -- during the depths of the recession and at the bear market's nadir. Obviously, what followed then were a historic surge in stocks and, a few short months later, the start of nine consecutive quarters (and counting) of economic expansion. The low confidence reading then wasn't particularly (or at all) predictive of the future.
This time around, confidence fell in October -- after similarly falling in recent months. Yet, for the past few months retail sales have risen -- further and further into record territory.
The chart below illustrates this phenomenon. Retail sales (red) have risen lately, while consumer confidence -- be it the overall index, future expectations or current conditions --has been highly volatile.
And that raises a further interesting point. If you actually followed the survey results and took them as gospel about future spending behavior, you might think retail sales would be hugely volatile as well. And they can be. But generally not to nearly the same degree as consumer confidence.
So what gives? Are consumers just lying to themselves? Or to the confidence survey takers? We don't think so, but actions certainly do speak louder than words. Which isn't anything new nor surprising. And ultimately, a review of confidence gauges like the Conference Board's or the University of Michigan's shows folks tend to feel better when data like GDP or unemployment improve -- or after stocks have risen. But for investors -- and those seeking insight into economic conditions ahead -- that's all backward looking and not terribly useful in crafting a forward-looking outlook.
Unemployment is a lagging indicator. GDP is backward looking, often revised and released at a significant delay. And what stocks did last month tells you nothing about what they'll do this month or next. In other words, you might get some insight into prevailing sentiment from confidence surveys. But their usefulness beyond that point is quite questionable indeed.
Perhaps the real takeaway here is for all the economists' notable work in identifying animal spirits and confidence fairies and attempting to measure them, a great tool to actually dig into what's stirring in consumers' guts is, well, lacking. Until we do have such a tool, you can safely chalk up the predictive quality of consumer confidence surveys (whether surging or crashing) in the same column you would political campaign promises. Which is to say, nice words that often don't match behavior.
This article constitutes the views, opinions, analyses and commentary of Fisher Investments as of October 2011 and should not be regarded as personal investment advice. No assurances are made Fisher Investments will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.