Consumer confidence is one measure of how we feel about the economy – and our confidence was way down in July.
You might think the Federal Reserve, which is meeting this week on interest rates, would be concerned with how we feel. But while feelings are important, on their own, an economy they do not make.
“Consumer confidence is a low-ranking indicator to policymakers at the Federal Reserve,” says Richard DeKaser, corporate economist for Wells Fargo & Company. “The Fed’s primary focus remains on two indicators: the labor market and inflation.”
That is, of course because the Fed is legally obligated to deal with the labor market and inflation. DeKaser says consumer confidence tends to follow these things, not predict them. And when it comes to feelings about the future, he says “people say one thing and then do another.”
“Consumer confidence measures don’t have such a strong link to economic performance,” says Carl Tannenbaum, senior economist for Northern Trust. “They don’t lead the way you think they might.”
But, he says “ignore them at your peril.” Just because the Fed doesn’t parse them , doesn’t mean your feelings aren’t important.
“We should care about feelings because consumers have been excellent predictors of recession,” says Lynn Franco, director of Economic Indicators for the Conference Board, a key source of consumer confidence data. “They can give us advance notice of when the economy is heading south.”
Consumer expectations tend to be a little ahead of the game when it comes to the bounce back from a recession, Franco says. She says consumer confidence is also "a good indicator of people’s willingness to buy.”
Northern Trust’s Tannenbaum says the Fed does pay attention to our feelings on some level, because they reflect how the Fed's message is being received.
“When the Fed communicates with the public, they’re figuratively trying to put their arm around our shoulders and assure us that what they’re doing will be something that pleases us all,” he says.
So consumer confidence is, in a way, also a sign of how well we feel the Fed is doing its job.