Economists often study how the economy affects humans and our conditions. What does rising interest rates mean for retirees? Will lower taxes lead to more income for the average homeowner? Does more government spending help reduce income inequality? Economists tackle these questions with rigour and yet many times I feel as though we are missing the other half of the story. Is it possible that our behavior as humans can affect the economy, instead of the other way around? Perhaps instead of the economy affecting our social mood, it is our social mood affecting the economy.

 

Whether or not social mood is a causing factor in the economy, there are some interesting correlations to be explored. Social mood can be hard to measure, but one interesting way is to look at the popular television shows throughout the years. In the year 1998, the Harvard Business Review said this was a new economy and that the U.S. economy is “sturdy, resilient, and raring to grow.” 1998 also happens to be the year “Sex and the City” was released, the popular show about wealthy businesswomen in New York. Fast forward 10 years and we see a radically different U.S. economy. The economy faltered as we saw the collapse of the investment banking industry with what was called the “most dangerous crisis since the Great Depression.” 2008 also happens to be the year “Breaking Bad” was released, a wildly popular drama about a cancer patient who resorts to crime to pay for his medical expenses. Both television shows seemingly mirror the time in which they were released, and both have drastically different implications about our social mood.

 

However fun it might be to compare popular television shows over different times, it might not be most objective measurement for social mood. Thankfully, The Conference Board runs a more qualitative Consumer Confidence Survey every month which in turn gives us a Consumer Confidence Index. This index is designed to measure the optimism of the economy based on consumer spending and saving habits. In figure 1, you can see the Consumer Confidence Index over the past 20 years, from January 1997 to January 2017.

Figure 1

 

As you can see from the table above, we find that consumer confidence looks to be similar to what we estimated by our analysis of television shows. We can see that people were indeed more confident with their spending habits in the late 90s, while after the Great Recession, there was a big dip in consumer confidence. We see that it hits the lowest point around 2008.

 

A similar metric to the Consumer Confidence Index is one done by the University of Michigan: The Consumer Sentiment Index. This index measures roughly the same thing, it surveys consumers on their optimism about the economy. I did a regression to see how correlated this index would be with GDP growth, in percent change. The results are below in figure 2.

 

When we look at the results, we see more evidence for social mood being correlated to the economy. These regression results suggest that consumer sentiment is correlated with GDP growth.  For this sample, an increase in one point on the Consumer Sentiment Index was associated with an increase .097 percentage growth change in GDP. The coefficient on consumer sentiment was highly statistically significant (p<.0001). The regression as a whole however did not fit well, (R2= .2604, adjusted R2= .2510) but was highly statistically significant (F= 27.81, p<.0001)

Figure 2

 

These results show us that consumer sentiment is correlated with GDP growth, however there is much more to the story as the regression as a whole did not fit well. This makes sense, as one would expect consumer sentiment to matter when looking at the economy, but certainly not be a sole causing factor in GDP growth.
By knowing that consumer confidence is correlated with the economy it allows us to make better decisions as individuals and analyze the economy in a more unique way. For example, after Trump’s win one might confused about the state of the economy moving forward. By using our indexes, we can see that his victory caused a large rise in consumer sentiment, which is interesting as many questioned his economic policy proposals. A few weeks later, we see that consumer confidence has dipped off again, perhaps as people get used to the Trump presidency and see that we haven’t truly seen any drastic changes in our economy. The whole point is that through these measures, we can get a real time story as to what Americans feel about the economy. These stories are invaluable to economists, as they allow us to further analyze the human nature in the data, and predict what may or may not happen next. At the end of the day, confidence really is key.

Confidence is Key: Consumer Confidence and How it Relates to the Economy