What You Should Know

Consumer confidence is a measure of perception, not actual economic activity. As a result, it can only be measured by survey—that is, by asking a carefully collected sample of people how they are feeling about their financial health and the economy overall.

There are two dominant measures of consumer confidence today: the Consumer Confidence Index (CCI) published by the nonprofit Conference Board and the University of Michigan’s Index of Consumer Sentiment (ICS). Both are revised and published monthly.

The CCI is based on a monthly survey of five thousand U.S. households. The survey, tabulated for each of the nine census regions and for the country as a whole, consists of just five questions designed to tease out consumer insights about the following:

Current business conditions

Business conditions for the next six months

Current employment conditions

Employment conditions for the next six months

Expectations of total family income for the next six months

The results are compared to similar results from 1985, considered a standard to measure against because the economy at that time was in the exact middle of a business cycle. The base is set at 100 and all other results are presented as an index versus the 1985 base. So a reading of less than 100 indicates consumer pessimism and a reading above 100 shows consumer optimism.

To put everything into perspective, at the depth of the recent recession in February 2009, CCI reported consumer confidence at 25.8; economists and the media rejoiced when it jumped to 40.8 by April of that year, still a very pessimistic figure compared to the 100 base and a reading of 144.7 in January 2000. More recently, in 2012, the index has ranged between 61.3 and 73.1; in 2013, between 58.4 and 76.2.

The ICS is similar to the CCI and asks five similar but not identical questions. The time horizon is different; respondents are asked to project economic conditions and their own finances for the next twelve months rather than six. As perhaps a truer proxy of expected behavior, they are asked about their attitude toward buying specific major household items, like automobiles.

Why You Should Care

A high CCI and ICS suggest good things ahead for the economy; a low reading reflects consumer pessimism and suggests a downturn. They are leading indicators of your own economic success. You may also want to measure your own “consumer confidence” against the readings—if you’re feeling worse about things while others are feeling better, that’s a sign that you need to consider some changes.

12. PRODUCTIVITY

Productivity is the amount of economic output, or value, derived from a unit of labor, land, or capital (the three generic forms of economic input).

What You Should Know

Productivity is a measure of economic efficiency, and especially the effectiveness of new technologies as applied to the economy. New technologies have allowed people to produce more and more, faster and faster, as anyone in today’s data- and communication-intensive world knows. But productivity increases based on technology aren’t new; the advent of railroads, electricity, and communications technologies have been revolutionizing commerce for years.

What’s most interesting is the increasing pace of technological innovation. It is still sobering to think that widespread personal computer availability and use has only occurred over the past twenty-five years; universal, browser-driven Internet use, and mobile phone use, for that matter, is less than twenty years old. It’s hard to imagine a business world without these things.

Economists study productivity in part because it’s an important factor in keeping a lid on inflation. As an economy grows, it typically adds inflationary pressure because the heightened demand for economic inputs drives prices higher. But when productivity increases—meaning more output can be generated with relatively less input—inflationary pressure is reduced. That fundamental was closely watched during the Federal Reserve’s Greenspan years, as the Fed could stimulate the economy with low interest rates without necessarily triggering inflation. Increased productivity, due mainly to advancements in technology, was one of the reasons.

Incidentally, that gain in productivity didn’t happen right away. For many years, economists recognized a productivity paradox, where the advent of technology tools did not necessarily spur productivity. This was the case in the late 1980s and early 1990s. In fact, some thought this new technology, especially computers, hurt productivity, since more resources were expended implementing the technology than producing output. Computer technology also increased the size of firms and bureaucracy, making both less manageable. The reality was that business hadn’t learned to use the machines effectively at that point. However that’s no longer the case, as U.S. productivity has been improving for years (though the rate of improvement has slowed in recent years). That, in fact, is one reason employment hasn’t responded as well to economic stimulus as policymakers might have hoped—companies have figured out how to produce more stuff without hiring more people.

Why You Should Care

Everyone should strive for greater productivity. As the economy becomes more productive, the onus is on you to become more productive personally too—otherwise you’re losing ground! When new technologies become available, it doesn’t mean you have to use them, but you should at least familiarize yourself with them. Imagine where you would be if you refused to use PCs, e-mail, and mobile phones!

At the same time, if U.S. economic productivity went into a decline, that would be a bad sign for both economic growth and inflation. More resources would be consumed to produce the same amount of output, which would likely result in higher inflation, shortages, poor profit performance on the part of firms, and, ultimately, higher unemployment. With productivity, “turning back the clock” is a bad idea.

13. ECONOMIC INDICATORS

Economists love to measure things and are always looking for ways to gauge future economic trends. They have developed a set of leading economic indicators, measures of the economy designed to help us figure out “where the puck is going,” as hockey great Wayne Gretzky would have put it. Economists also track a set of lagging economic indicators to measure where the economy has been, diagnose change, learn from it, and make better predictions for the future.

What You Should Know

Like the CCI, the Conference Board has put together a monthly index that combines ten different leading indicators, not surprisingly referred to as the Conference Board Leading Economic Index (LEI). Without going into details (although some are covered in this book), here are the ten leading indicators:

Stock prices

Index of consumer expectations

Manufacturers’ new orders for consumer goods

Manufacturers’ new orders for nondefense capital goods

Average weekly manufacturing hours

Interest rate spreads

Index of supplier deliveries

Initial claims for unemployment insurance

Money supply

Building permits

There are seven lagging indicators in the Conference Board Lagging Economic Index (LAG):

Ratio of consumer installment credit to personal income

Commercial and industrial loans outstanding

Average duration of unemployment

Change in labor cost per unit of output

Change in prices (Consumer Price Index) for services

Ratio of manufacturing to trade inventories

Average prime rate charged by banks

So any economic measure must be either leading or lagging, right? No, nothing is ever quite so simple. Some indicators are considered to be right in the middle, or coincident indicators. The Conference Board tracks four of these in its Coincident Economic Index (CEI):