The impact of the 2008-09 recession was profound, certainly in terms of broad economic impact such as gross domestic product and employment.
It also changed the psyche of many business people, who are quicker now to look for directional signals to help forecast where the economy is going. Some business leaders still are largely guided by “gut,” while others use customer or supply chain anecdotes as their economic research.
Media reports on federal data releases also offer clues on economic trajectories though, particularly for small business leaders, this information can be more confusing than insightful. Most economic data is backward looking.
Publication lag time limits the data’s usefulness for guiding business decisions, instead restricting its role to confirming what leaders may be sensing intuitively or experiencing directly. For example, local and regional data documenting changes to GDP are typically released 12 to 18 months after they have been collected. In 2019, we see what happened in 2017.
That information is certainly helpful to public policy makers but is too late to guide business decision-making effectively.
So where can small business leaders turn for a simple, real-time barometer of the economy? One great option is the University of Michigan’s Index of Consumer Sentiment. This indicator is a long-standing, highly regarded measure, and it is available for free (sca.isr.umich.edu). The Index measures consumer optimism based on household attitudes toward current conditions and future expectations.
It’s a valuable measure, as households are considered the engine of our economy. This spending, termed consumer spending or personal consumption, accounts for almost 70 percent of gross domestic product. As such a sizable share of the economy, household spending can drive economic expansions and contractions.
Dating back to the early 1950s when the index was first collected, consumer sentiment and gross domestic product have loosely tracked together.
While economists may argue over whether consumer confidence is a lagging or leading indicator on the direction of the economy, it has two advantages for any business. It is easily accessible, and it has one of the shortest lag times between when the data is collected and when it is released, making it highly relevant to real-time decisions.
Businesses use measures of consumer confidence to discern headwinds and tailwinds in the economy. A strong drop in the index can signal economic downturns, while continuous month-over-month decreases in consumer confidence can suggest an economic slowdown.
The behavior of the index over the first part of 2019 is insightful. The year started with January’s consumer confidence at its lowest level since June 2016, which is largely attributed to the federal government shutdown.
With three months of data for this year, January’s reading does not appear to signal a downturn. Consumer confidence recovered. Although slightly lower than this time last year, consumer confidence remains at historically high levels. Consumers do not appear to be signaling a weary outlook or plans to put the brakes on the economy.
Trends in the consumer confidence index have relevance not just to businesses selling direct to households, but for small and large businesses regardless of their industry sector.
A monthly look at the index can be one factor to assess if course corrections and planning adjustments are warranted. The index also introduces a simple step toward a more disciplined approach to utilizing good data analytics to guide business decision making.
• Naomi Young is director of Economic Development Co. Lancaster County’s Center for Regional Analysis.