A Confidence Crisis In Consumer Confidence Forecasts?

The Conference Board and the University of Michigan have published their measures of consumer confidence for years, but they hit the big time during the Persian Gulf war. When consumer confidence dropped almost 40% after Iraq's invasion of Kuwait last August, economists forecast that consumers were going to spend less. And the rebound of confidence in March, 1991, was seen as a sign that consumers were ready to buy cars and homes again.

But fame may be fleeting for these indicators. According to an upcoming study by C. Alan Garner, a senior economist at the Federal Reserve Bank of Kansas City, consumer-confidence measures usually don't accurately forecast consumer spending. Toward the end of the 1981-82 recession, a drop in consumer confidence gave few clues that a sustained recovery in durable-goods purchases, such as cars, was about to begin. And measures of confidence stood at an all-time high in 1989, even as consumers were starting to cut back.

Garner suggests that watching consumer confidence makes sense only during exceptional events, such as wars, when consumer sentiment can rapidly shift. But once the war is over, paying too close attention to confidence measures can be a mistake. Since March, the Conference Board's Index of Consumer Confidence has drifted down by 4%. If Garner's analysis is right, though, that needn't rule out a continued improvement in consumer spending.

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