Consumer confidence vs. consumer sentiment
Shoppers walk down the Third Street Promenade outdoor shopping mall in Santa Monica, Calif.
It’s the last Tuesday of the month, which means it’s the day we hear about how consumers are feeling about the economy from the Conference Board.
Today the Consumer Confidence Index says that consumers are downright gloomy.
But come Friday, you may hear something different about how consumers are feeling from the University of Michigan, which releases its Consumer Sentiment Index.
You may be asking yourselves what’s the difference between these two monthly metrics?
Sr. Producer Paddy Hirsch explains the difference in today's Money Matters segment.
"Both measure consumers' ability or willingness to buy stuff," says Hirsch. "So say you're thinking about buying a refrigerator. So the consumer confidence questions -- the questions that they ask when they're polling people -- essentially ask you are you going to be happy buying a refrigerator in six months time. The consumer sentiment people, they're asking you how you feel about buying a refrigerator right now. "
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Kai Ryssdal: This being the last Tuesday of the month makes it the day we learn how consumers are feeling about the economy. The relevant economic number is called consumer confidence from a group called The Conference Board. Not confident at all is a pretty fair summary of today's report. But come Friday you may hear something completely different about how consumers are feeling from the University of Michigan, which releases something called the Consumer Sentiment Index. I know at this point you're saying sentiment, confidence -- what's the difference? And why do I care?
Here to explain with today's installment of Money Matters -- our series about how the news affects our wallets -- is Paddy Hirsch, the senior producer of our personal finance show Marketplace Money. Hey Paddy.
Paddy Hirsch: Hello Kai.
Ryssdal: So make me smart here, my friend. The difference, please, between consumer confidence -- the number out today -- and consumer sentiment because honestly I've been doing this a long time and I still get confused.
Hirsch: Sure. So confidence, sentiment, sounds like exactly the same thing -- consumer happiness, right? But what this is about is consumers' ability or willingness to buy stuff.
Hirsch: All right. So say you're thinking about buying a refrigerator. So the consumer confidence questions -- the questions that they ask when they're polling people -- essentially ask you are you going to be happy buying a refrigerator in six months time. The consumer sentiment people, they're asking you how you feel about buying a refrigerator right now.
Ryssdal: So I just got a big bonus and I can afford this refrigerator right now. But in six months, who knows? Unemployment's still up, meh...
Hirsch: Yeah, gas prices, whatever. All those things are playing into those equations. So the difference is right now or in six months time.
Ryssdal: So let's say you're running Paddy Hirsch, Inc., and it's a sluggish economy, you're trying to maximize profits obviously, which number do you look at right now?
Hirsch: I think I'd be looking more costly at the consumer confidence number. For two reasons...
Ryssdal: That is the six months out number?
Hirsch: That is the six months out number. Firstly because it's a much larger pool. They look at 3,000 respondents as opposed to 500 in the consumer sentiment one. But also because it's all about managing your inventory. You want to know how much you've got to be ordering in the future and if you've got a surplus right now, how are you going to cope with that?
Ryssdal: Right. Today is instant and six months is the macro picture.
Ryssdal: This is, the statisticians would say, a statistically significant sample. They're not just stopping guys in the street?
Hirsch: They kind of are stopping guys in the street.
Ryssdal: Are they really?
Hirsch: Yeah. In the case of the Consumer Confidence Index, the consumer board actually does this by mail, randomly. So you might get a flier through the mail, totally random, asking you to fill in this survey. So that's how they do it. The consumer sentiment people, they do it over the phone and it's also random. They're not using the same people every time. I rang up and asked the consumer board, the conference board, if I could actually join,
Ryssdal: Did you really?
Hirsch: Yeah and I asked if I could join the index. And they said, well only if...
Ryssdal: That's like self-selection, you can't do that.
Hirsch: Well, it was worth a try. Right? They said no, you've got to be lucky enough to get a form in the mail.
Ryssdal: Let me get a little jargon-y on you here, are these leading indicators? Does it give us a sense of where the economy is going?
Hirsch: Potentially. Although these have been a little patchy in terms of their record about predicting how the economy is going, in the past. Last Christmas, for example, consumer confidence was way down, but sales went up. So it's not necessarily particularly a good indicator.
Ryssdal: That's that whole "lies, damned lies, and statistics" thing.
Hirsch: It's that whole grain of salt thing.
Ryssdal: Yeah, that's right. Paddy Hirsch is the senior producer of our personal finance program, it's called Marketplace Money. His book, which is out today, is called "Man vs. Markets: Economics Explained (Plain and Simple)." Paddy Hirsch. Thanks Paddy.
Hirsch: Thank you, Kai.