What The Consumer Sentiment Index Isn’t Telling Us
In
Tuesday’s column, I discussed the disconnect between many of the
traditional indicators and the real direction of the economy, such as the CRB
and industrial production. Well today, I have another example–The Conference
Board’s Consumer Confidence Index.
Despite the fact that CB Consumer Confidence
Index plunged 15 points yesterday to new lows at 61.6–and continues in a
downtrend, the National Association of Realtors reported record monthly sales of
existing homes, up 2.2%. Furthermore, the backlog of permits is at a 12-year
high. Basically, the consumer continues to keep the economy propped.
Is The Consumer Lying?
At the same time, however, the consumer seems to
be reporting that his/her financial situation is grim. Is the consumer suffering
from multiple personality disorder or is the Conference Board’s Indicator an
inaccurate measure of consumer sentiment? Well, if the consumer were really that
badly off, then he/she would not be making such a significant financial
commitment.
The real issue here is the questions that are asked by the conference board’s
pollsters. The Conference Board survey does not include any specific questions
about consumer purchasing or buying climate, which would affect the outcome of
the index. Instead, the survey focuses its questions on the polled person’s
perception of overall business conditions, now and into the future.
This perception is easily affected by some of the
near-term factors that are weighing on everyone’s minds, such as geopolitical
uncertainties/price of energy. And although these factors can become an issue
should the geopolitical uncertainties drag out into the future, investors would
be better served by looking at the bigger economic picture–since the
macro-economic backdrop is solid. And once these uncertainties are removed, the
economy could rebound nicely.
Is There a More Accurate Index?
I recommend that investors reference the ABC News/Money magazine Consumer
Comfort Index. This particular index measures the current consumer buying
climate, which incorporates some of the current strength in the housing sector,
partially offsetting any of the current, short-term negative factors
concerning consumers. The ABC index has rebounded off its lows, and its
current reading is the best since late last year.