What is Consumer Confidence?
Consumer confidence is an economic indicator designed to quantify the degree of optimism consumers feel about the economy and their personal finances. The more confidence the public has about the state of the economy, the more likely they are to make bigger purchases such as new vehicles. Historically consumer confidence indicates consumer spending; consumer spending accounts for over two-thirds of the gross domestic product (GDP).
The degree of consumer confidence thus becomes a valuable measuring tool and driving force for the stock and bond markets as well as business growth, or lack of hiring and expansion.
How is Consumer Confidence Measured?
The good news is that consumer confidence is one of the few indicators which reaches down to the average household. It relates to people’s feelings, not just statistics.
The bad news is that the sample size (typically 5,000) is small and tends to be very localized. Since it measures how the public “feels” about the economy, it is highly subjective. Quantifying feelings leaves a significant margin for error.
Statistics support Benjie’s comment as consumer confidence fell in December, 2012 and again in January, 2013 by 8.1 points. It currently sits at 58.6. In contrast, it was 100% in 1985.
President Obama tried to put a rosy glow on the economy in his State of the Union address February12, 2013. He claimed that six million new jobs were created but neglected to mention the five million jobs lost during his first term. America did have a 1.2 million net increase in jobs, which is a positive. The government does not really create jobs; they change the source of the paycheck from private sector businesses to the government payroll.
When progress is evident in the labor market, the stock market is up, and home values are increasing, the optimism increases in the marketplace. The growth of small business, not the growth of government increases optimism and confidence in the marketplace.
Why is Consumer Confidence Low?
Many requirements and details of ObamaCare are still unfolding; the payroll tax increased from 4.2 to 6.2 percent for both the employer and employee on January 1, 2013, and the economy is still sluggish. None of these factors inspire, encourage or offer a feeling of stability and increased profit for small business owners.
Bloomberg reported that the improving job market had eased the strain caused by the higher payroll tax. Despite that glimmer of hope, worker productivity fell measurably. This decline in worker productivity is another indicator of low confidence in the marketplace.
Results of Low Consumer Confidence
One man commented that his small business, a service company, is not seeing any improvement in the private sector’s willingness to purchase.
People are postponing purchases waiting to see which direction the economy will turn. This high degree of uncertainty on the part of small business owners is reflected in their marketing, new product development, hiring and discretionary spending. Hesitation on the part of small business owners replicates in the confidence of employees and customers.
A decrease in consumer purchasing snowballs into reduced business revenue, reduced business spending and reduced tax revenue. Conversely, the snowball builds in a positive direction when consumer confidence and purchasing increases.
Small business owners and hopefully the decision makers in government are focusing on
“How can we improve consumer confidence?” Small business remains a driving factor in the American economy; consumer confidence plays a significant role in the actions of small business owners. We are all in this together. Let’s focus on “How can we” improve consumer confidence.