There's no truly comprehensive way to accurately gauge consumers' collective whims in a nation of more than 300 million people. But the Conference Board's Consumer Confidence Survey may be the best tool we've got.
For 41 years, the private research group has been asking consumers the same questions each month to discern their thinking about the economy, their place in it and where it's headed. On Tuesday, the Conference Board reported its confidence index plummeted to an all-time low.
How is this index calculated, and what does it tell us about the economy? Some questions and answers:
Q: What is the Conference Board?
A: It's a nonprofit, nonpartisan research organization based in New York that caters to its business members. The board's trustees include chief executives of leading global corporations, many of them outside the U.S.
Q: What's the Consumer Confidence Index?
A: It's a number that fluctuates depending on responses to monthly surveys. The October index stands at 38, down from 61.4 in September. The benchmark level of 100 is based on readings in 1985.
Q: How are surveys conducted?
A: TNS, a market information firm, conducts the surveys for the Conference Board. On the first day of each month, 5,000 U.S. households are sent questionnaires by mail. A different group is surveyed each month, and each is screened to try to represent a demographic cross-section of the nation.
By the time preliminary results are published on the last Tuesday of each month, about half of the households surveyed have typically sent back responses.
Q: What are survey participants asked?
A: Five questions. The first two ask the respondent's views of current business conditions, and expectations of what those conditions will be in six months. The third and fourth questions are about the current job market and expectations for six months down the road. The final question asks about family income expectations in six months.
For example, participants can characterize business conditions as either "good" or "bad," or respond that jobs are "hard to get" or "plentiful."
Q: How do they come up with an index number based on the responses?
A: Responses are categorized as positive, negative or neutral. For each question, the number of positive responses is divided by the sum of positive and negative responses. The Consumer Confidence Index is the average of the numbers for the survey's five questions. So, basically, more positive responses means a higher index; more neutral and/or negative responses means a lower one.
The survey also calculates a Present Situation Index, applying the same calculation just to the questions about the current business conditions and the current job market. An Expectations Index is based on just the three forward-looking questions.
Q: Lots of research companies and private groups conduct surveys that measure consumer thinking and behavior. Why is the Confidence Board's survey so closely watched compared with the others?
A: The board's survey has asked the same five questions since it began in 1967. That consistency and long track record make the board's index highly regarded. Other strengths are the large sample size of 5,000 households, and reliance on surveys sent by mail. Many other surveys rely on smaller pools of respondents, or question participants via e-mail or other methods considered less likely to yield a broad cross-section of Americans.
Q: What's an example of another widely watched gauge of consumer confidence, and how is it different?
A: One is the Reuters/University of Michigan index of consumer sentiment, which plunged in early October to its second-lowest level in the past 28 years. Scott Hoyt, senior director of consumer economics at Moody's Economy.com, said that survey is more focused on personal finances, where the Conference Board's survey emphasizes the jobs market.
"Our view is to consider them collectively to get a sense of what's going on," Hoyt said.
Q: Why do these findings matter?
A: Consumer spending accounts for two-thirds of gross domestic product — a measure of the value of all goods and services produced within the U.S. Economists often reason that consumers who are pessimistic about their prospects — as many are now — are less likely to spend. To match consumer demand, companies must reduce output, which means they'll probably stop growing — and consequently might have to lay off workers, or at least stop hiring new ones.
Retailers and credit card providers are two examples of companies that closely watch consumer confidence. But even companies that don't directly deal with consumers — say, a supplier of data storage to big businesses — can be affected, because consumer spending helps dictate how much businesses spend. If consumer confidence falls month after month, a recession is usually around the corner, if it isn't there already.
When the economy is stable, the surveys are less likely to yield useful information about spending trends than when conditions are volatile, Hoyt said.
But even in times of trouble, the surveys can be misleading. For example, after the Sept. 11 terrorist attacks, consumer confidence indexes fell sharply. But consumer spending held up better than expected, Hoyt said, as retailers became more generous with discounts, auto dealers rolled out zero-financing deals and the housing market boomed.
"Consumers took advantage of what they saw as a once-in-a-lifetime opportunity, and spent," Hoyt said.
Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.