Recently released reports in the US show that consumer confidence is up; however, there are still drags on the economy. We asked our Zintro experts to comment on how these reports help or hinder consumer confidence, their effect on business, and what is behind the numbers.
Jose Poncela, an economist, says that consumer confidence indexes are leading indicators on how the economy will behave in the near future. Consumer indicators are widely used by companies, banks and policy makers but they are used with more care during a crisis than in normal times. In times of high risk aversion, leading indicators perform poorer than in economically stable times.
“If consumer confidence is high, families are confident in the future and will increase spending. Precautionary savings will diminish and consumption will increase, especially for cars, homes, and consumer durables,” Poncela explains. “Companies often react by first trying to sell their stocks, then they increase the number of hours worked by current personnel and, only after that, if sales remain high, they hire new workers and increase capacity through investments.”
Poncela says that consumer confidence is an economic signal that helps to build confidence by telling consumers, businesses, and the population in general how the economy will behave a few months from now. “Expectations are important and have a self fulfilling prophecy component. However, consumer confidence indexes have their limitations,” he says. “Events can change a family’s perception of the state of the economy and consumption won’t materialize as previewed.”
Poncela says that changes smaller than five percent in consumer confidence indexes are usually discarded as irrelevant. “During a crisis, as the one we are in currently, the economy is too volatile and companies trust less than in normal times. Companies need to see that these indicators are confirmed to make a decision. In the end, the indicators become less accurate forecasters of the future evolution of the economy,” he says.
Susan Zweibaum, an integrated marketing and communications expert, says that consumer products such as food, health and beauty, and household cleaning items are less affected by the levels of consumer confidence because they are necessities. “With these products, consumer confidence reports do not have much of an impact on manufacturing other than to understand how best to market to the consumer,” she says. “In a bad economy, when consumer confidence is down, we tend to see an uptick in things such as coupons and rebate offers and usage and an increase in private label purchases.”
Companies that manufacture more luxury goods or durables such as cars and appliances are going to be more affected by the consumer confidence levels because the consumer is apt to spend if he or she feels things are getting better, says Zweibaum. “The reports give manufacturers some indication as to why they may be seeing ups and downs in sales and can give direction as to how best advertise and provide special offers.,” she says. “However, ultimately, businesses are focused on what their sales are, what their retailers want, and how to incentivize their customers to purchase. An economic indicator, whether positive or negative, will not help them do that.”
Dr. Szabolcs Nagy, a marketing professor, says that consumer confidence always reflects expectations for the future. “It is like a self-fulfilling prophecy. It can either help or hinder businesses; however, consumer confidence feeds from many sources including ones that businesses can influence,” he says. “Social media helps to change consumer expectations as our preconceptions have a serious impact on how we evaluate the same performance. Broadcast, printed, or electronic optimism in business helps to avoid the downward spiral effect.”
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