The U.S. Economic Confidence Index: Do the Polls Matter?

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Despite being in the expansion phase of the business cycle, consumer polls continue to show a negative overall opinion of the economy and prospects for the future. Image courtesy of the Bureau of Labor Statistics.

Polls? Nah … they’re for strippers and cross-country skiers — Sarah Palin

One of the most common methods used to sample the tastes, opinions and attitudes of the citizenry is by taking polls.

Concern about public opinion predates the French Revolution. Worried about investor confidence, King Louis XVI’s General Director of Finance Jacques Necker proposed publishing key information to help shape l’opinion publique”. 

Opinion polls date back to at least the 1800s, when selected American newspapers and magazines conducted straw polls and mail surveys. Today, polls are as popular as ever, remaining a key way to take the pulse of the people.

Economic Improvement and the Polls

By many accounts, the stream of recent economic news in the United States has painted a picture of slow, steady improvement since the depths of the Great Recession.

At 6.1%, the unemployment rate is the lowest it’s been in six years. After a poor first quarter, GDP grew at an annualized 4.2% during the second quarter, with reports indicating a pending revision to 4.7%. Interest rates remain low, as does inflation.

And yet, consumer sentiment remains mixed. Although the Consumer Confidence Index — a gauge designed to measure expectations of current and future business conditions, current and future employment conditions, and personal income — reached a seven-year high in August (92.4), other polls aren’t as positive.

Gallup’s U.S. Economic poll, for example, currently shows that 54% of respondents believe things are getting worse, while only 39% said they are getting better. Likewise, its U.S. Economic Confidence Index remains firmly in the negative.

What Is the U.S. Economic Confidence Index?

Per Gallup’s web site, the U.S. Economic Confidence Index is defined as follows:

Gallup’s Economic Confidence Index is based on the combined responses to two questions, the first asking Americans to rate economic conditions in this country today, and second, whether they think economic conditions in the country as a whole are getting better or getting worse. Monthly results are based on telephone interviews with approximately 15,000 national adults; margin of error is ±1 percentage point. 

Gallup explains how the index works in the following passage:

Gallup’s Economic Confidence Index is the average of two components: Americans’ views on the current economic situation and their perceptions of whether the economy is getting better or worse. Last week, 19% of Americans said the economy is “excellent” or “good,” while 35% said it is “poor,” resulting in a current conditions score of -16 — a three-point dip from the previous week. While 38% of Americans said the economy is “getting better,” 56% said it is “getting worse,” resulting in an economic outlook score of -18. This is one point lower than the prior week.

Per the most recent results, the ‘conditions’ score of -16 and the ‘outlook’ score of -18 average to -17: the current overall economic confidence score.

 What Is the Significance of the Index?

The index is a statistically-relevant measurement of the sentiment of (as Jacques Necker would say) l’opinion publique”.

Simply put, a number below zero means more people have a negative overall outlook on the economy than a positive one. Particularly striking about the poor overall sentiment is that the economic recovery is now in its sixth year, long enough to where the economy should be booming and sentiment should be strongly positive. Although the trend is upward, the economic news clearly has not been good enough for a sustained period of time to tilt the polls upwards.

It should be noted that the Economic Confidence Index is moving in the right direction. After declining to -53 in August, 2011, it improved rapidly to -3 in May, 2013. The index dipped back down to -39 in October, 2013, before rebounding to its current level.

Is the Economic Confidence Index a Leading or Lagging Indicator?

Everyone knows that opinions and facts aren’t always in sync. That said, it’s clear that the Economic Confidence Index is shaped by current events, and is thus a reactive, lagging indicator.

As long as this doesn’t shut down again anytime soon, the U.S. Economic Confidence Index has a chance to move into positive territory next year. Image by Noclip

The government shutdown of October 1-16, 2013 caused the index to fall by more than 25 points in the span of 30 days. After the federal government resumed normal operations, the index quickly recovered, but has remained generally flat ever since — much as the economy has been so far this year.

The Near-Term Outlook

It’s going to take more than a slow, grinding recovery to push the polls into positive territory. As I discussed in this piece about the Federal Reserve, the combination of an artificially-stimulated economy and the mixed results of a negative first quarter and solid second quarter just haven’t been enough to move the dial of public opinion polls into the black.

The outlook for the next twelve months looks promising, but there’s a lot of road between here and there to navigate, with any one of the inevitable twists and turns capable of tanking the opinion polls once again.

If Neckar were still with us, it would be tempting to turn to him for answers. However, since he essentially invented the concept of cooking the books in 1781 with his falsified ‘Compte Rendu du Roi’ (‘The King’s Balance Sheet’), perhaps not. We likely have enough of that going on as it is.

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