The InvestMentor

December 2, 2002

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Whenever I hear the latest reading of “consumer confidence,” I think of phrenology.

Familiar with phrenology? If not, suffice to say it was one of those now-humorous steps along the developmental path of medicine, specifically psychology. Phrenology dates to the 19th century and involved measuring the bumps and contours of the skull, for the purpose of divining insight into mental workings of the skull’s owner.

To me, rubbing a bumpy noggin is about as insightful as the tracking the Consumer Confidence Index. But the Index sure sounds meaningful, doesn’t it? We should endeavor to figure out how people are feeling. Actually, not to be insensitive, but we call them “consumers” since all we care about is how they spend, and, well, we don’t really care about feelings—we want to know how confident they are about their financial well being. If we gauge this, the theory goes, we’ll get a sense about upcoming economic growth or weakness.

That is, if it weren’t for three things.

First, Consumer Confidence measures are a lagging indicator. That is, they reflect the view of consumers, and that’s highly biased to the recent-past. Consumers don’t really have an “outlook,” because they can only base their “confidence” on the anecdotal evidence in their own life—past events—and what they hear in the media. Which leads to our next point…

Consumer Confidence is an echo of the media’s reporting on the economy. Well employed, financially stable people that can’t see a weak economy will tell you there is one, if they hear it enough on the news. But that’s not their reality, and that doesn’t dictate their behavior, except on the margin. That’s because…

Actions speak louder than words. The third reason the Index doesn’t matter is that people very often say one thing and do another. The Consumer Confidence Index took huge hits after September 11th, and most recently this autumn. How has consumption been? Solid as a rock. The strong upward spending trend remains unbroken and the housing market couldn’t be firmer. We’re saying one thing, doing another.

Volatile Consumer Confidence figures only distort a strong and recovering economy that won’t be derailed. The case for investing in stocks still trumps that of cash, bonds, and real estate. The most recent behavior—where previously hammered stocks have shown life—is a very good sign and consistent with the recovering bull market that began just last month.

Nowadays the only place you come across phrenology is at carnivals. You can even measure your lumpy melon in a device called a psychograph. Maybe Consumer Confidence readings will one day end up with the carnies as well. “Step right up! Let me guess your Consumer Confidence!”