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  • (playful music)

  • - [Narrator] This is an economic surveyor.

  • He's doing something kind of radical.

  • Well, for back then.

  • He's not asking her about her finances.

  • He's asking her how she feels about her finances.

  • He's surveying for the Consumer-Sentiment Index,

  • one of two main measurements of--

  • - Consumer confidence.

  • - Consumer confidence is very low.

  • - [Narrator] Consumer confidence, how people feel

  • about the strength of the economy now and in the future.

  • Here's how it became an important indicator

  • and why the Federal Reserve thinks it's the key

  • to bringing down inflation.

  • Consumer confidence is different

  • from other measurements

  • because the man who created the first survey,

  • Dr. George Katona wasn't just an economist,

  • he was also a psychologist.

  • He began surveying consumers in 1946.

  • Before that, according to his book,

  • economic surveys were all about asking people

  • what their changes in income were, numbers.

  • But he thought it would be important

  • to know how people felt about their personal finances

  • and the changes they expected.

  • - You have all these economists walking around

  • with all their spreadsheets and all their numbers.

  • You have these Fed officials getting up there

  • and speaking a language nobody really understands.

  • And then at the end of the day,

  • so much of all this comes down to feelings.

  • - To me, economics is a social science.

  • I am also one of those folks

  • that's running around with a clipboard

  • and looking at spreadsheets.

  • - [Narrator] Dr. Joanne Hsu is Katona's successor

  • at the University of Michigan

  • where she oversees the survey

  • for the Consumer-Sentiment Index.

  • - I have always been really interested

  • in how people make economic decisions

  • and what better way to learn about that

  • than just ask people?

  • - [Narrator] The survey, conducted by calling

  • a nationally representative sample of people

  • on their cell phones asks five questions

  • that are nearly identical

  • to the five asked 70 years ago.

  • Compared to a year ago,

  • financially, are you better off or worse off?

  • What do you expect a year from now?

  • In a year, what do you think business conditions will be?

  • In the next five years, do you expect continuous good times

  • or unemployment and depression?

  • And when it comes to major household appliances,

  • is now a good time or a bad time to buy?

  • - We wanna make sure that our questions

  • are timeless and are not really specific

  • to the '60s, specific to the 2000s.

  • - [Narrator] The five questions are calculated

  • into the Consumer-Sentiment Index.

  • The higher the number, the better consumers are feeling.

  • The lower the number, the worse they feel.

  • And it's a pretty reliable indicator.

  • - And if you look at our consumer confidence measure

  • and you look at GDP growth,

  • you can see that consumers actually do a really good job

  • anticipating changes in GDP.

  • A majority of GDP is consumer spending.

  • So what better way to understand where GDP is going

  • than to understand how consumers are behaving?

  • - [Narrator] In the 1960s, as consumer confidence began

  • to be regarded as an important measure,

  • another survey began, appropriately named

  • the Consumer-Confidence Index,

  • run by the Conference Board.

  • You can see the results are pretty similar

  • to each other but their questions

  • are slightly different.

  • The Conference Board asks more about your job,

  • like do you think there will be more or less jobs

  • in your area in six months?

  • So their index is more receptive

  • to consumers' feelings around the job market,

  • while Michigan's index is more receptive to inflation.

  • You can see the difference in the 2008 recession.

  • As people lost their jobs,

  • the confidence index dropped more than the sentiment index.

  • - If you focus more on labor markets,

  • you're gonna have higher levels of confidence.

  • If people are focusing more on inflation,

  • that's something that will show up on our data.

  • - [Narrator] In 2022, that is showing up.

  • - And what we're discovering now

  • with these falling sentiment numbers

  • is that even though the job market is really strong

  • and unemployment is really low,

  • Americans are very frustrated and pessimistic

  • because of the inflation they're experiencing.

  • - [Narrator] And these indexes

  • have become leading indicators

  • because they both indicate recessions.

  • Often when they begin to drop, a recession follows.

  • Well, except for this blip here in 2011.

  • - It was not followed by a recession.

  • Sentiment was extremely low

  • because of the debt ceiling negotiations

  • and that was a factor that was lifted very quickly.

  • - [Narrator] But the drop in sentiment in 2022

  • has economists worried.

  • - It's why the Federal Reserve is very focused

  • on convincing people, and why you hear people

  • like Jay Powell say he's gonna get this under control

  • because he doesn't want people

  • to start thinking that inflation is here to stay.

  • - We think that the public generally sees us

  • as very likely to be successful

  • in getting inflation down to 2%,

  • and that's critical.

  • It's absolutely key to the whole thing.

  • - There is definitely a potential for self-fulfillment

  • when it comes to inflation.

  • The specific way this typically happens,

  • if people believe that inflation is going to get worse,

  • they might start stockpiling

  • and buying more now if they believe prices

  • are gonna go up in the future.

  • And if they front load their consumption

  • and bring their future consumption into the present,

  • that is an increase in demand

  • and that will increase prices by itself.

  • - [Narrator] It's why the Federal Reserve

  • doesn't just need to lower inflation.

  • Chairman Powell needs the public to feel confident

  • that they will.

  • - Jay Powell is playing a mind game right now.

  • He's out there to convince not only the public

  • but the markets that he's not gonna allow this thing

  • to get worse and that he's gonna get it under control.

  • - [Narrator] The confidence indexes

  • can't make consumers more confident

  • but at least they provide a measurement

  • of how they're feeling.

  • - Consumers, workers are the backbone of the economy.

  • Understanding their intentions

  • and their experiences in the economy tells us a lot

  • for the trajectory of the economy.

  • - [Narrator] Thanks to a psychologist who understood

  • that behind all these economic numbers are people.

  • (pensive music)

(playful music)

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B1 US WSJ narrator consumer inflation confidence sentiment

Why Consumer Confidence Is Key to Fighting Inflation | WSJ

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    Yui posted on 2022/07/31
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