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AUTHOR Griffitts, Dawn TITLE Does Confidence Measure Up to the Hype? INSTITUTION Federal Reserve Bank of St. Louis, MO. PUB DATE 2003-00-00 NOTE 6p.; Adapted from " Surveys," which was written by Jeremy Piger and appeared in the April 2003 issue of "The Regional Economist," a St. Louis Fed publication. AVAILABLE FROM Public Affairs Department, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166. Tel: 314-444-8809; Web site: http://www.frb.org. PUB TYPE Collected Works Serials (022) -- Guides Non-Classroom (055) JOURNAL CIT Inside the Vault; v8 n1 Spr 2003 EDRS PRICE EDRS Price MF01/PC01 Plus Postage. DESCRIPTORS *Consumer ; Consumer Education; *Economic Factors; *Economics Education; Secondary Education; Social Studies

ABSTRACT This economic education publication features an article, "Does Consumer Confidence Measure Up to the Hype?," which defines consumer confidence and describes how it is measured. The article also explores why people might pay so much attention to consumer confidence indexes. The document also contains a question and answer section about deflation as well as a bulletin board. (BT)

Reproductions supplied by EDRS are the best that can be made from the original document. Does Consumer Confidence Measure Up to the Hype?

Dawn Griffitts

Federal Reserve Bank of St. Louis, MO.

00 U.S. DEPARTMENT OF EDUCATION Office of Educational Research and Improvement 71- EDUCATIONAL RESOURCES INFORMATION CENTER (ERIC) cr) pp. This document has been reproduced as r received from the person or organization originating it. O Minor changes have been made to 2 improve reproduction quality. Points of view or opinions stated in this document do not necessarily represent Ci) BEST COPY AVAILABLE official OERI position or policy. THE INSEVAULT An economic education newsletter from the Federal Reserve Bank of St. Louis DOES CONSUMERCONFIDENCE MEASURE UP TO THE HYPE?0,1,

Every month, the two primary Interestingly, con- measures of U.S. consumer confi- sumer confidence dence, the University of Michigan's appears to correlate Index of Consumer Sentiment andwith the strength of the Conference Board's Consumer the economy at the Confidence Index, are released with time of the survey. much media fanfare. The attention When the economy these indexes receive often centers on goes into a recession, their potential to provide more infor- consumer confi- mation regarding current and future dence generally falls economic conditionsand the belief sharply. When the that changes in the two indexes may economy expands, foreshadow changes in general eco- consumer confi- nomic conditions. dence generally rises to high levels, What Is Consumer Confidence often peaking before and How Is It Measured? the economy enters "Consumer confidence" is a catchall a recession, phrase for the opinions and attitudes of about the current and What's All the future strength of the economy As Fuss About? a psychological concept, consumer One reason why confidence is difficult to measure. people might pay so The University of Michigan and the much attention to consumer confi- following month. Thus, because &inference Board both measure dence indexes is because khey may consumer confidence is timely, it consumer confidence by asking a provide an early Signal regarding the could be a useful early indicator of random sample of consumers five strength of the economy, These sur- the economy's performance. questions about current economic vey data are released very quicklyin A second way in which the consumer conditions and expected future most instances long before other data confidence survey information might conditions (on back). Consumers measuring the strength of the econo- prove Useful is if responses to survey also are asked to evaluate their my are released. For example, the questions provide good forecasts of personal-financial situation. consumer confidence indexes for a future economic activity Consumer After the surveys are conducted, the given month are generally released confidence serves as a convenient responses are compiled into a single toward the end of that month. In con-summary of the forecasts of many number, called an "index" of con- trast, the personal expen-individuals based on a variety of infor- sumer confidence. Changes in this diture report, which measures what index are meant to measure changes consumers actually did that month, in overall,consumer confidence. is not available until the end of the continued on back If deflation means As a holder of debt, a fam-could be simultane- output. Both also hurt rj that prices are ily would be repaying ously hurt and help'ed investment lower, why is it bad that debt with more valu-by deflation. and may adversely affect for the economy? able dollars. In'addition, families. The Federal that same deflation may Is deflation worse Reserve is committed re, \ The effects of defla- decrease the real value o than inflation? to maintaining price tion, a sustained of any property assets stability because it is fall in the general price such as a house or land Both deflation and necessary for sustain- level, are substantially that the family owns. o inflation cost the able long-term eco- the reverse of those of Thus, many families economy in terms of nomic growth. inflation. Unanticipated deflation is costly to bearers of long-term debtborrowers because the dollars they 1st Quarter 2003 pay back are more valu- 02-02 03-02 04-02 01-03 able than those they Growth RateReal borrowed, i.e., those Gross Dolnestic Product 1.3% 4.0% 1.4% 1.6%* dollars have more pur- Inflation Rate chasing power. Thus, Consumer Price Index 3.5% 2.2% 2.0% 3.9% creditors benefit at the Civilian Unemployment Rate5.8% 5.8% 5.9% 5.8% expense of debtors. In addition, owners of *Preliminary Estimate assets inay find that the value of their assets has decreased, thus decreas- ing their wealth. _Price Indexes InAex, 1967 = 1 Wouldn't anyone flgain from deflation? CPI-Services, 7.00 Those with fixed Average Price Increases for Past Five Years money incomes CPI-Services 3.2 would find their real CPI-All Items 2.3 CPI-AII Items CPI-Goods 1.1 incomes enhanced even 5.00 without a change in their PPI 1.2 nominal incomes. And CPI-Goods savers would find the pur- PPI chasing power of their savings has grown 3.00 assuming those savings are in fixed-value mone- tary assetsbecause of the falling prices of 1.00 goods and services. 1972 1977 1982 1987 1992 1997 2002

So, some people are Graph from February 2003 issue of National Economic Trends. o better off and some worse off during periods of deflation? What is the difference between the CPI and the PPI? The Producer Price Index (PPI) is a family of indexes that measures The fact that any the average change over time in selling prices received by domestic ogiven family may producers of goods and services. The PPI measures price change from be an income earner, a the perspective of the seller. holder of financial assets, PPIs contrast with other measures, such as the Consumer Price Index an owner of real assets (CPI), that measure price change from the purchaser's perspective. and a holder of debt Sellers' and purchasers' prices may differ due to government subsidies, simultaneously would sales and excise taxes, and distribution costs. probably cushion the redistributive impact of Why have goods prices risen so much more slowly than services prices? deflation. If the family Tremendous advances in technology and productivity in goods produc- owns fixed-value mone- tion have produced cost savings in manufacturing. tary assets such as savings accounts, deflation would increase their real value. Bulletin Board

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Fed Challenge 2003 June 16-20 and 24-25, 2003 An economic comPetition for high schoolstudents Making Sense of Money and Banking Are you looking for a way to bring real-world Federal-Reserve Bank of St. Louis economics into your classroom? Fed Challenge, This is a seven-day, three-creditcourse open a competition for highschool students sponsored to elementary and secondary teachers and by the Federal Reserve Bank of St. Louis, callsfor osher educators interested in integrating five-member teams to do research and analyze money and banking topics into social studies, data about current economic conditions andthen language arts and math: The course will fea- recommend a specific course for monetary policy. . ture guest speakers from the Federal Reserve The student teams make 15-minute presentatidns Bank of St. Louis, as well as tours, hands-on before a panel of judges in a mock Federal Open activities, simulations for classroomuse and Market Committee forum, followed by 15 minutes . breakout sessions for elementary andsec- of Q & A. Look for fall'coaching workshops and ondary teachers. Registration through either team registration information on ourWeb site at Southern 'Illinois University at Edwardsvilleor www.stlouisfed.org/education/fedchal/. the University of Missouri-St. Louis is required. Three hours of graduate credit will be awarded to. educators completing the course. For more information contact: Ellen Eubank (901) 579-2421 To register for ECON 500B-501 through SIUE, Memphis contact Mary Anne Pettit at ,(618) 650-2583. Little Rock Lyn Haralson (501) 324-8240 To register for ECON 310: Money and Banking through UMSL, contact Sarapage MCCorkle'at Louisville Faith Weekly (502) 568-9216 (314) 516-5249. Ask about scholarships for practicing teachers in Missouri. St. Louis Dawn Griffitts (314) 444-8421 For more information, Contact DaWn Griffitts, manager of economic education at the Federal Reserve Bank of St. Louis, at (314) 444-8421or call toll-free 1-800-333-0810, ext. 44-8421.

Fall Teacher Conference A one-day conferencefor educators K-12 the St. Louis Fed's fallteacher conference! Mark your calendar now sothat you don't miss grades K-8 Oct. 21Federal ReserveBank of St. Louis, teachers Conference Schedule grades 9-12 !Oct. 22Federal ReserveBank of St. Louis, teachers grades K-12 Oct. 28LouisvilleBranch Bank, teachers grades K-12 Oct. 29MemphisBranch Bank, teachers grades K-12 Oct. 30Little RockBranch Bank, teachers information will be sent inSeptember, or visit our There is no fee, but registrationis required. Registration web site at www.stlouisfed.org/educiation.

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Inside the Vault is written by Dawn Griffitts, manager those of the Federal Reserve Bank of St. Louis or the of economic education at the Federal Reserve Bank of_ Federal Reserve Syst&n. Please direct all comments and St. Louis, PO. Box 442, St. Louis, MCI 63166. The views questions about' the publication to (314) 444-8421 or expressed are those of the author and are not necessarily [email protected].

5 continued from front future economic activity? Several The fildhseesity of iichilEees economistS tested whether the value. Survey Questions mation. Who knows? Consumers of the University of Michigan.index might be good at forecasting the eCon- from a month, say, January, was able 1) We are interested in how people are omy. To the extent that these forecasts to.improve projections of February's getting along financially these days. are useful for predicting economic consumption growth. They conclud- Would you say thatyou (and your family activity, indexes of consumer confi- ed that when consumer confidence is living there) are better off or worse off dence can serve as a leading indicator used as the only variable, it can signif- financially than you were a year ago? of the economy's strength. icantly. improve these forecasts. 2) Now, looking ahead, do you think that a Thus, if an economic forecaster were year from now you (and your family living When Trapped on a tra'pped on a deserted island with only there) will be better off financially, worse Deserted Island data on consumer confidence, use of off or just about the same as now? Many research studies have attemptedthe consumer confidence measures 3) Now turning to business conditions in the to determine if consumer confidence to educate her guess about the econoT country as a wholedo you think that is a useful early signal of economic my's strength in general would not during the next 12 months we'll have good activity. Economist.Phillip Howrey be a bad idea. However,'consumer, times financially, bad times, or what? of the University of Michigan tested confidence is not data with "super- .4) Looking ahead, which would you say is whether predictions of current period forecasting" powers. Nonetheless, more likely: that in the country as a consumption growth can be more these data get super attention each whole we'll have continuous good times accuratesby using results from the month when they're reported. during the next five years or so, or that Michigan confidence index from that we will have periods of widespread period. Howrey concluded that the Thisarticle was adapted froth "Consumer unemployment or depression, or what? Michigan index does provide some Confidence.Stirveys," which was written 5) About the big things people buy for their useful information for predicting by Jeremy Piger and appeared in the April homessuch as furniture, a refrigerator, the value of consumption growth, 2003 issue of The Regional Economist, stove, television and things like that a St. Louis Fed publication. although the degree of improvement generally speaking, do you think now is a is generally small. good or bad time for people to buy major What about the possibility that household items? consumer confidence might predict

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