Alex Steer

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The problem with consumer confidence

699 words | ~3 min

There's been much reporting in the last few days of the fall in US consumer confidence (more here, with a particularly good analysis from the FT (login required), who argue that the recovery is stalling and there's unlikely to be a major policy effort to stop that happening.

So now's a good time to talk about consumer confidence. The authors of the CCI give a nice definition [PDF]:

The index is based on consumersÂ’ perceptions of current business and employment conditions, as well as their expectations for six months hence regarding business conditions, employment, and income.

The CCI is very useful, but there's a need for caution when using it to make predictions about how people will behave. Doing that kind of prediction assumes a consistent relationship between confidence and consumer behaviour. The logic is that if we're more confident about the economic outlook and our personal finances, we'll be more willing and likely to spend rather than hoard. It assumes, then, that we're pretty rational, and scale our behaviour in the market according to our level of confidence.

But we aren't, and we don't - at least, not consistently. Fans of the anchoring bias will recognize that when making judgements we rely pretty heavily on the pieces of information that happen to be available to us, and fans of peer effects will tell us that we balance our expectations based on the expectations of those around us.

So what happens to rational expectations in an economy that's been down so long that we've forgotten what up feels like? There's little doubt that the last three years have seen major revisions in consumer behaviour in the US, moving through initial defensive shock and withdrawal from spending, to a reconsideration of spending and value priorities which was prematurely called the 'new normal', to the 'won't get fooled again' self-reliance which has characterized the last year, driven by the dawning awareness that the economy is not going to recover fast.

In this kind of scenario, the relationship between confidence and behaviour gets strained. People long ago got tired of waiting for the economy to recover - they went through the painful process of adjusting their priorities, and now a lot of them feel smarter for the experience. They're not pinning their hopes on growth and stability; they're finding ways to live without confidence. They're realizing they can't stay in shock forever, and there might even be something liberating about not feeling like we're all waiting for the sun to shine.

There's plenty of evidence that people are starting to plan a little more for the future, to make careful investments and try new things - in spite of the economy and their personal finances, not because of them. Some of these may be below the threshold of the kinds of intended consumer behaviours the CCI asks about - maybe not yet as big as buying a car or a house or major appliances. In that sense these small changes that are taking place in hearts and heads may not yet be all that interesting to marketers, but they should be. They may mean that economic and financial confidence is no longer the best predictor of purchasing behaviour, which in turn may signal a renegotiated relationship between consumers and brands, one based on meeting knowingly irrational expectations that are more personal or social in their orientation than they are economic. It may turn out that all the things marketers have been signalling more during the downturn - price, value, being a savvy shopper - are the things they should now be signalling less, because their consumers already know them, and are simply tired of the rentless hustling.

# Alex Steer (01/06/2011)