Customer Confidence

Customer Confidence

By Paul A. Herbig

Consumers drive the economy. . An estimated $4 trillion annually is spent by consumers Consumer spending is basically all that has kept the economy afloat for past 3 years. Consumer spending is fickle prone to how consumers believe the economy is behaving now or heading in the near-term future. This consumer confidence expects marketing and business behavior in many different ways.

Every month two consumer surveys are issued: The Consumer Confidence Index (CCI)which is issued by the Conference Board, a New York City nonprofit based business research organization. The index of Consumer Sentiment (ICS) is managed by the Survey Research Center at the University of Michigan. The CCI is a mail survey of 5000 consumers while the ICS is a random phoning of 500 consumers. Both ask the consumers to evaluate the present and project into the future six months up to one year. Over a year’s period of time, the CCI can fluctuate over 40% (In 2001, it hit a high of 130 in June and dipped to 90 just after 9/11). Expectations of business conditions, consumer spending, an appraisals of current conditions are asked of these randomly surveyed consumers. In essence, consumer confidence figures are really a measure of how the consumer feels about himself/herself; if they are worried they will not readily let loose of the purse-strings and retailers will realize their concern quickly.

The key factor affecting consumer sentiment is employment. Many economists indicate we are in the forefront of an economic recovery, an economic event not like other traditional recoveries and which they are calling a ‘non-job” or ‘jobless’ recovery. For consumers, a recession is not over until they are employed. The old adage, “A recession is when your neighbor is out of work; a depression is when you are out of work.” still holds. Indeed a large part of the sluggish economy seen today can be traced immediately back to that ‘non-job’ part. (although current national unemployment is under 6%, low historically, it pales to the 4 percent and lower that it was two-three years ago and the consumer typically has a very short term memory, the what have you done lately for me attitude prevails). If I do not feel comfortable about the permanence of my job, I am not confident and will not spend above the absolute minimum necessary for the survival of my family. Business might be running lean and mean but at what human costs?

What do the indexes indicate for 2003? Having peaked just before summer of 2002, they both fell by year’s end, off nearly 35% from their peak. Christmas shopping was mixed for 2002 but overall sales did not reach expected levels. Extrapolation would indicate businesses are in for a rocky road for 2003 with the major concerns being war with Iraq, North Korea unease, and a still not quite yet recovery (and yes, that always concern about whether or not the consumer’s own job will be there).

So how does he consumer confidence indexes relate to marketing? Both the consumer confidence indexes help retailers, marketers, bankers, investors, and manufacturers predict what the almighty American consumer might (or might not) do in the next six to twelve months. It is not a guarantee as unique events such as war or terrorism could well impact the indexes. The American consumer is moody, unpredictable, appearing to change moods more often than the weather. However, it is a useful piece of information that has been shown to be highly reliable in the past and probably the future as well (The ICS has consistently outperformed other measures in anticipating changes in the economy six to nine months hence).

The two surveys are used not just for stock analysts but also for business forecasting, marketing efforts, investment decisions, and even inventory control decisions. Consumer confidence numbers affect whether Christmas will be cheery for the retailers or a down year. They affect purchases of durable goods (cars, furniture, appliances) and hence a low confidence level can result in poor forecasts for the manufacturers of these goods and hence probably poorer financial results. It can be tough on banks as well; when consumers are feeling less confident they will tend to spend less and use their credit cards less often as a result.

In summary, the all-powerful consumer controls the economic future. Be wary of him. Listen to him. Be kind to him. Worship him.