Consumer Confidence and Economic Cycles

Consumer sentiment and consumer confidence are two indexes showing consumers’ perceptions of current business, income and employment conditions, as well as their expectations for the near future’s economy.

 Figure 1

Figure 1 shows both the University of Michigan Index of Consumer Sentiment and the Conference Board Consumer Confidence Index are highly inversely correlated with the unemployment rate. High unemployment drives down consumer confidence/sentiment and a declining unemployment rate leads to rebounds in confidence/sentiment. The rapid decline in the unemployment rate in the recovery from the recession in the early 1980s coincided with a rapid rise in confidence/sentiment. The more sluggish decline in the unemployment rate following the most recent and early 1990s recessions coincided with a slower rebound in confidence/sentiment. As the unemployment rate approaches a more normal level recovering from the most recent recession these indicators of consumer confidence/sentiment are returning to levels historically associated with a healthy economy.

 Figure 2

Figure 2 presents the Consumer Confidence Index and its subcomponents, the Present Situation Index and the Expectation Index from the Conference Board. The separate components of the Conference Board index suggest that consumers have stronger reactions to current conditions rather than expectations about the future as indicated by the higher volatility of the present situation index.

 Figure 3

As might be expected, Figure 3 shows that while plans to buy a home typically decline during economic recessions, the decline was especially deep during the most recent recession which included the bursting of the housing bubble. The sharp increase in plans to buy a home since 2011 coincides with an improving economy but also points to pent-up demand after several consecutive years of depressed home sales. The figure also shows that plans to buy a new home (i.e., trade-up buyers) are sensitive, but less sensitive than overall buyers to economic conditions.

 



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