These are twitchy times. Consumer confidence reports show that Americans are getting more nervous about their jobs and the economy every month, and one closely watched survey by the Conference Board put confidence levels at the lowest point in a decade.
But that won't necessarily translate to a retail slowdown. Observers say consumer confidence isn't an absolute predictor of retail sales — potentially good news for the industry. “Consumer confidence is one of those numbers that none of my clients focus on,” says Howard Davidowitz, chairman of Davidowitz & Associates, a New York retail consulting firm. “What do you do with the number? My clients focus on sales, how business is really doing, on sell through.”
Michael P. McCarty, senior vice president of research and corporate communications for Simon Property Group, agrees that the correlation to retail sales isn't strong, though he says the findings may have a more direct impact on companies “closer to the chain of production.” So, public pessimism may lead appliance makers to scale back production plans, but it doesn't necessarily mean fewer consumers will be buying jeans or shoes tomorrow or next month.
“We tend to look at both the University of Michigan survey and the Conference Board's as a weather forecast,” McCarty says. “They're very useful in identifying whether there are storm clouds on the horizon (see chart.)” Other factors, he says, also influence spending decisions. Consumers may be concerned about their jobs down the road, but right now they've refinanced the house at a much lower rate.
The Conference Board's Consumer Confidence index fell to 64 in February, from 78.8 in January. The last time it was lower was in October 1993. The University of Michigan Consumer Sentiment Index dropped in February, too — to 79.9 from 82.4. Survey director Richard Curtin said that while the findings show no sign of a sharp drop in spending, a severe decline could materialize if a terrorist act occurs on U.S. soil.
The Deloitte Research Leading Index of Consumer Spending concludes that consumer spending will slow this year as Americans pay down their debt and rebuild savings. It pegged the rise for the year at 6.2 percent, down from 7 percent in February.
“With cash from the past year's reduction in their tax burden, real-income growth and home mortgage refinancing, consumers are in a position to continue spending,” notes Carl Steidtmann, the chief global economist for Deloitte Research. But, he says, they're choosing instead to build savings and get rid of debt.
Analysts say the most useful information concerns employment. When consumers fear they might lose their jobs, they respond by scaling back purchases, especially of big-ticket items. That's especially useful data for manufacturers and others close to the chain of production.
The consumer confidence reports do have one big impact on retail: They move stock prices. “The people who react to the reports most are the financial analysts,” says Davidowitz.
FUTURE ECONOMIC ACTIVITY
History shows that while flagging consumer sentiment doesn't necessarily have an immediate impact on retail sales, it can be an indicator of long-term trends. The University of Michigan Consumer Sentiment Index, for example, anticipated most recent recessions — in 1975, 1980, 1982, 1991 and 2001 — in the year prior to the downturn in the Gross Domestic Product. Rising optimism later signaled the end to the recessions as well.
Percent change in annual growth rate in GDP and Index of Consumer Sentiment