Former U.S. Labor Secretary Robert Reich discusses an all-too-familiar trend: “consumer confidence” is rising among the well-off, but falling among families earning $50,000 per year or less. This is an example of an important and more general fact about many prevailing economic indicators: by lumping together the well-off and the poor, they conceal more than they reveal.
In the Northwest US, for example, “average” family incomes rose at a healthy clip from 1990 through early 2001. But that concealed two contrasting trends: family income for the top-earning fifth of households shot up by about $30,000, even as incomes for the bottom fifth stagnated or declined. (See our 2003 economic security report for more details.) So on average, we were all doing better—but only in the same way that, on average, Bill Gates and 39 paupers are all billionaires.
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But even as Reich explodes one myth about consumer confidence, he helps perpetuate another. According to Reich’s article:
[Consumer confidence] is an important indicator. When confidence is up, consumers are likely to spend more money, which gives the economy a further boost.
Well, no. Actually, the consumer confidence index is surprisingly bad at predicting future consumer behavior. (See this Forbes Magazine <a href="http://www.sightline.org/
http://www.forbes.com/2001/09/25/0925confidence.html”>article, for example, for more details; I’ve read other studies that back this up.) The virtual uselessness of the Consumer Confidence Index at predicting future trends is a fact that economic boosters trot out when the numbers look grim, but ignore when they’re more favorable.
The easiest critique of the Consumer Confidence Index and related measures is that they contribute to the idea that confident consumers are an unalloyed good, rather than a mixed blessing. But perhaps the more important point is that, as a guide to our economic fortunes, consumer confidence is next to useless.