Would you start a family if you were pessimistic about the future of the economy? Buckles et al (2017) (see link below) believe that fewer of us would do so and, therefore, fertility rates could be used by investors and central banks as an early signal to pick up subtle changes in consumer confidence and overall economic climate.
Their study titled ‘Fertility is a leading economic indicator’ uses ‘live births’ data, sourced from US birth certificates, to explore if there is any association between fertility changes (measured as the rate of change in number of births) and GDP growth. Their results suggest that, in the case of the USA, there is: dips in fertility rates tend to precede by several quarters slowdown in economic activity. As the authors state:
The growth rate of conceptions declines prior to economic downturns and the decline occurs several quarters before recessions begin. Our measure of conceptions is constructed using live births; we present evidence suggesting that our results are indeed driven by changes in conceptions and not by changes in abortion or miscarriage. Conceptions compare well with or even outperform other economic indicators in anticipating recessions.
Conception and GDP Growth Rates (source Buckles et al p33: see below)
Although this is not the first piece of academic writing to claim that fertility has pro-cyclical qualities (see for instance, Adsera (2004, 2011), Adsera and Menendez (2011), Currie and Schwandt (2014) and Chatterjee and Vogle (2016) linked below), it is, to the best of our knowledge, the most recent paper (in terms of data used) to depict this relationship and to explore the suitability of fertility as a macroeconomic indicator to predict recessions.
Economies, after all, are groups of people who participate actively in day-to-day production and consumption activities – as consumers, workers and business leaders. Changes in their environment should affect their expectations about the future.
Are people, however, forward-looking enough to guide their current behaviours by their expectations of future economic outcomes? They may be, according to the findings of this study.
Did you know, for instance, that sales of ties tend to increase in economic downturns, as men buy more ties to show that they are working harder, in fear of losing their job[1]? But this is probably a topic for another blog.
Give two reasons why fertility rates may be a good indicator of economic activity.
Give two reasons why fertility rates may NOT be a good indicator of economic activity.
Do a literature search to identify and explain an ‘unorthodox’ macroeconomic indicator of your choice, and how it has been used to track economic activity.
These are challenging times for business. Economic growth has weakened markedly over the past 18 months with output currently growing at an annual rate of around 1.5 per cent, a percentage point below the long-term average. Spending power continues to be squeezed, with the annual rate of inflation in October reported to be running at 3.1 per cent compared to annual earnings growth of 2.5 per cent (see the squeeze continues). Moreover, consumer confidence remains fragile with households continuing to express particular concerns about the general economy and unemployment.
Here, we update our blog of July 2016 which, following the UK vote to leave the European Union, noted the fears for UK growth as confidence fell sharply. Consumer confidence is frequently identified by macro-economists as an important source of economic volatility. Indeed many macro models use a change in consumer confidence as a means of illustrating how economic shocks affect a range of macro variables, including growth, employment and inflation. Many economists agree that, in the short term at least, falling levels of confidence adversely affect activity because aggregate demand falls as households spend less.
The European Commission’s confidence measure is collated from questions in a monthly survey. In the UK around 2000 individuals are surveyed. Across the EU as a whole over 41 000 people are surveyed. In the survey individuals are asked a series of 12 questions which are designed to provide information on spending and saving intentions. These questions include perceptions of financial well-being, the general economic situation, consumer prices, unemployment, saving and the undertaking of major purchases.
The responses elicit either negative or positive responses. For example, respondents may feel that over the next 12 months the financial situation of their household will improve a little or a lot, stay the same or deteriorate a little or a lot. A weighted balance of positive over negative replies can be calculated. The balance can vary from -100, when all respondents choose the most negative option, to +100, when all respondents choose the most positive option.
The European Commission’s principal consumer confidence indicator is the average of the balances of four of the twelve questions posed: the financial situation of households, the general economic situation, unemployment expectations (with inverted sign) and savings, all over the next 12 months. These forward-looking balances are seasonally adjusted. The aggregate confidence indicator is thought to track developments in households’ spending intentions and, in turn, likely movements in the rate of growth of household consumption.
Chart 1 shows the consumer confidence indicator for the UK. The long-term average of –8.6 shows that negative responses across the four questions typically outweigh positive responses. In November 2017 the confidence balance stood at -5.2 roughly on par with its value in the previous two months, though marginally up on values of close to -7 over the summer. However, as recently as the beginning of 2016 the aggregate confidence score was running at around +4. In this context, current levels do constitute a significant change in consumer sentiment, changes which do ordinarily mark similar turning points in economic activity.(Click here to download a PowerPoint of the chart.)
Chart 2 allows to look behind the European Commission’s headline confidence indicator for the UK by looking at its four component balances. From it, we can see a deterioration in all four components. However, by far the most significant change in the individual confidence balances has been the sharp deterioration in expectations for the general economy. In November the forward-looking general economic situation stood at -25.5, compared to its long-run average of -11.6. (Click here to download a PowerPoint of the chart.)
The fall in UK consumer confidence is even more stark when compared to developments in consumer confidence across the whole of the European Union and in the 19 countries that make up the Euro area. Chart 3 shows how UK consumer confidence recovered relatively more strongly following the financial crisis of the late 2000s. The headline confidence indicator rose strongly from the middle of 2013 and was consistently in positive territory during 2014, 2015 and into 2016. The fall in consumer confidence in the UK has seen the headline confidence measure fall below that for the EU and the euro area. (Click here to download a PowerPoint of the chart.)
Consumer (and business) confidence is closely linked to uncertainty. The circumstances following the UK vote to leave the EU have undoubtedly created the conditions for acute uncertainty. Uncertainty breeds caution. Economists sometimes talk about spending being affected by two conflicting motives: prudence and impatience. While impatience creates a desire for spending now, prudence pushes us towards saving and insuring ourselves against uncertainty and unforeseen events. The worry is that the twin forces of fragile confidence and squeezed real earning are weighting heavily in favour of prudence and patience (a reduction in impatience). Going forward, this could create the conditions for a sustained period of subdued growth which, if it were to impact heavily on firms’ investment plans, could adversely impact on the economy’s productive potential. The hope is that the Brexit negotiations can move apace to reduce uncertainty and limit uncertainty’s adverse impact on economic activity.
Draw up a series of factors that you think might affect consumer confidence.
Explain what you understand by a positive and a negative demand-side shock. How might changes in consumer confidence generate demand shocks?
Analyse the ways in which consumer confidence might affect economic activity.
Which of the following statements is likely to be more accurate: (a) Consumer confidence drives economic activity or (b) Economic activity drives consumer confidence?
What macroeconomic indicators would those compiling the consumer confidence indicator expect the indicator to predict?
Analyse the possible short-term and longer-term economic implications of a fall in consumer confidence.
How might uncertainty affect consumer confidence?
What do the concepts of impatience and prudence mean in the context of consumer spending? When consumer confidence falls which of these might become more significant for consumer spending?
In our blog What can we read into signs of easing consumer confidence? we noted the slight easing in consumer confidence that had occurred since the autumn of last year. Nonetheless, at that time, survey data from the European Commission was continuing to show consumer confidence levels still well above their long-run average. However, following the UK vote to leave the European Union consumer confidence has fallen sharply and now the headline confidence indicator has fallen below its long-term average for the first time since June 2013.
We take this opportunity to update our May blog to better understand the extent and nature of the decline in confidence. The importance of confidence changes is typically modelled by economists in their models of the macroeconomy as a demand-side shock. Falling consumer confidence would be expected to dampen an economy’s output levels since aggregate demand falls as households spend less. Consequently, a marked fall in confidence amounts to a negative demand-side shock.
The European Commission’s confidence measure is collated from questions in a monthly survey. In the UK around 2000 individuals are surveyed. Across the current 28 member states over 41 000 people are surveyed.
In the survey individuals are asked a series of 12 questions which are designed to provide information on spending and saving intentions. These questions include perceptions of financial well-being, the general economic situation, consumer prices, unemployment, saving and the undertaking of major purchases.
The responses elicit either negative or positive responses. For example, respondents may feel that over the next 12 months the financial situation of their household will improve a little or a lot, stay the same or deteriorate a little or a lot. A weighted balance of positive over negative replies can be calculated. The balance can vary from –100, when all respondents choose the most negative option, to +100, when all respondents choose the most positive option.
The European Commission’s principal consumer confidence indicator is the average of the balances of four of the twelve questions posed: the financial situation of households, the general economic situation, unemployment expectations (with inverted sign) and savings, all over the next 12 months. These forward-looking balances are seasonally adjusted.
Sometimes other combinations of the 12 questions are averaged to produce alternative headline confidence numbers (see, for example, the newspaper articles below). These may include a mix of forward and backward-looking questions. However, in this blog we report on the European Commission’s principal confidence indicator as outlined above. The intention is that this or any other confidence indicator tracks developments in households’ spending intentions and, in turn, likely changes in the rate of growth of household consumption.
Chart 1 shows the consumer confidence indicator for the UK. The long-term average of –8.7 shows that negative responses across the four questions typically outweigh positive responses.
In July the confidence balance stood at –9.2 down from –1.2 in June. This 8 point fall is the largest monthly fall in this particular headline indicator since January 1991 when it fell 11 points. The fall also means that not only do negative responses now dominate but more so than is usual. The fall in confidence is therefore very stark indeed. (Click here to download a PowerPoint of the chart.)
Chart 2 is important because it enables us to see what drives the European Commission’s headline confidence indicator for the UK by looking at its four component balances. The sharp decline in confidence is reflected in a deterioration in all four components. (Click here to download a PowerPoint of the chart.)
The most notable change in the individual confidence balances is the sharp deterioration in expectations for the general economy. In July the forward-looking general economic situation balance fell to –29.9 having stood at –15.7 in June. As recently as last December it registered –1.4. This is the lowest forward-looking general economy confidence balance since October 2012, though still some way above the –50.1 reported in July 2008 when the financial crisis was unfolding.
Alongside the 14 point drop in the balance for general economy expectations, the UK experienced 8 point drops in both the balances for households’ financial expectations and the expectations of saving over the next 12 months. In other words, households expect to become financially poorer and less able to save.
The monthly survey contains other questions that can help to predict future spending patterns. For example, we might expect the responses to questions relating to perceptions around what the survey call ‘major purchases’ to give us some important insight in households’ financial well-being and spending plans. ‘Major purchases’ are taken to be items such as furniture, electrical goods and electronic devices.
Chart 3 shows the balances to both whether now is the right time to make major purchases and to whether respondents expect to spend more on major purchases in the coming 12 months compared to the past 12 months. July’s data show a marked deterioration in sentiment towards making major purchases. The balance relating to whether now is the right time to make major purchases fell by 6.5 points, the largest fall since December 2011, while the forward-looking major purchase balance fell by 4.6 points, the largest fall since January 2011. (Click here to download a PowerPoint of the chart.)
The fall in the major purchases balances is consistent with the idea that households are feeling a sense of heightened uncertainty. The implication of this is that households will tend to be more cautious, cutting back on expenditures, including major purchases.
The magnitude of the fall in UK consumer confidence following the outcome of the EU referendum on 23 June is even more stark when compared to developments in consumer confidence across the 28 member states of the European Union and in the 19 countries that make up the Euro area.
Chart 4 shows how UK consumer confidence recovered relatively more strongly following the financial crisis of the late 2000s. The headline confidence indicator rose strongly from the middle of 2013 and, as we noted earlier, was consistently in positive territory during 2014 and remained so at the start of this year. The slump in consumer confidence in the UK means that the headline confidence measure has now fallen below that across the EU as well as that in the euro area. In fact, confidence in the euro area has been consistently between –7 or –9 for the past six months. (Click here to download a PowerPoint of the chart.)
Interest now turns to whether the slump in confidence in the UK will persist or, worse still, deepen further. The implied negative impact on aggregate demand would be expected to translate into weaker growth. The concern therefore is the extent to which we can expect UK growth to weaken in the months ahead. The prospect of weaker growth is likely to influence economic policy.
The government has already talked about ‘resetting fiscal policy’ which can be taken to mean a relative loosening in its fiscal policy relative to the Government’s original plans. Similarly we might yet see a further loosening of monetary policy. While the Bank of England’s Monetary Policy Committee held the official Bank Rate at 0.5 per cent at its July meeting, many commentators expect a cut sooner rather than later. The confidence data will be one important consideration in the Bank’s calculations.
Draw up a series of factors that you think might affect consumer confidence.
Analyse the ways in which consumer confidence might affect economic activity.
Explain what you understand by a positive and a negative demand-side shock. How might changes in consumer confidence initiate demand shocks?
Which of the following statements is likely to be more accurate? (a) Consumer confidence drives economic activity. (b) Economic activity drives consumer confidence.
What macroeconomic indicators would those compiling the consumer confidence indicator hope that the indicator would help to predict?
Analyse the possible economic implications of the fall in consumer confidence following the EU referendum vote.
What economic effects might any persistence in the fall in consumer confidence have?
Economists spend a lot of time analysing consumers’ spending intentions. This is unsurprising given that UK household consumption is the equivalent to around two-thirds of Gross Domestic Product. One factor that is argued to affect spending decisions is consumer confidence. Despite a slight easing in recent months, survey data from the European Commission continue to show relatively high confidence levels among UK households. This follows a surge in consumer confidence during 2013 and into 2014.
Rising consumer confidence is identified frequently by economists as a positive demand-side shock. Therefore, rising confidence would be expected to boost an economy’s output levels as aggregate demand rises. The opposite holds for falling consumer confidence which is an example of a negative demand-side shock.
Given the impact that confidence can have on economies it is important to have measures which might be thought, however imperfectly, to capture consumer confidence. The European Commission’s confidence measure involves a monthly survey of around 2000 individuals in the UK. Across the 28 member states over 41 000 people are surveyed.
In the survey individuals are asked a series of 12 questions which are designed to provide information on spending and saving intentions. These questions include perceptions of financial well-being, the general economic situation, consumer prices, unemployment, saving and the undertaking of major purchases.
The responses elicit either negative or positive responses. For example, respondents may feel that over the next 12 months the financial situation of their household will improve a little or a lot, stay the same or deteriorate a little or a lot. A weighted balance of positive over negative replies can be calculated. The balance can vary from –100, when all respondents choose the most negative option, to +100, when all respondents choose the most positive option.
The European Commission’s consumer confidence indicator is the average of the balances of four of the twelve questions posed: the financial situation of households, the general economic situation, unemployment expectations (with inverted sign) and savings, all over the next 12 months. The balances are seasonally adjusted.
Chart 1 shows the consumer confidence indicator for the UK. The long-term average of –8.8 shows that negative responses across the four questions typically outweigh positive responses. However, the current confidence balance is just above zero at +0.8. So, as well as indicating a generally positive disposition across UK households, confidence levels are well above the long-term average. (Click here to download a PowerPoint of the chart.)
Chart 2 enables us to see what has been driving the European Commission’s confidence indicator for the UK by looking at its four component balances. From it we can see that the boost to confidence in 2013 and 2014 coincided with a dramatic improvement in expectations of the general economic situation in the year ahead and a rapidly falling proportion of respondents expecting unemployment to rise.
The easing in confidence since the turn of the year appears largely to be the result of deteriorating expectations over the general economy. In April the forward-looking general economic situation balance had fallen to –12.5 the lowest balance since June 2013. The deterioration in this balance slightly lags the growing belief that unemployment will rise over the next 12 months, which began to take hold last Autumn. Some commentators argue these trends might reflect the uncertainty caused by the EU referendum to be held in the UK on 23 June. (Click here download a PowerPoint of the chart.)
The monthly survey contains other questions that can help to predict future spending patterns. For example, we might expect the responses to questions relating to perceptions around what the survey called ‘major purchases’ to give us some important insight in households’ financial well-being and spending plans. ‘Major purchases’ are taken to be items such as furniture, electrical goods and electronic devices.
Chart 3 shows the balances to both whether now is the right time to make major purchases and to whether respondents expect to spend more on major purchases in the coming 12 months compared to the past 12 months. We can see a marked improvement in sentiment from around the middle of 2013.(Click here to download a PowerPoint of the chart.)
By the start of 2015 there was a positive balance of individuals feeling that now was the right time to make major purchases. While this balance remained positive in April 2016 at +5.9 this was down from +11.7 back in January. Meanwhile, the forward-looking major purchase balance has fallen slightly in each of the last three months. But, it is still on a par with levels at the end of 2015. Hence, it is perhaps a little too early to talk of any significant easing of forward-looking sentiment around more major purchases having yet become established.
Taking the two major purchase balances together the tentative evidence points to a relatively mild easing in sentiment. This is consistent with the overall consumer confidence indicator.
It would seem that while consumer confidence has eased a touch from the highs of the past couple of years, confidence levels remain strong. Nonetheless, policymakers will be keeping a very keen eye on any signs that this easing in confidence is becoming entrenched with its implications for weaker consumption growth.
Draw up a series of factors that you think might affect consumer confidence.
Analyse the ways in which consumer confidence might affect economic activity.
Explain what you understand by a positive and a negative demand-side shock. How might changes in consumer confidence initiate demand shocks?
Which of the following statements is likely to be more accurate? (a) Consumer confidence drives economic activity. (b) Economic activity drives consumer confidence.
What macroeconomic indicators would those compiling the consumer confidence indicator hope that the indicator would help to predict?
In recent times expectations about the path of the economy have been less optimistic. Yet at the same time more people are positive about how their financial situation will develop. What might explain this apparent contradiction?
What might the long-term average value of the consumer confidence indicator reveal about peoples’ natural perceptions and expectations of their well-being?
There’s been much talk about the UK’s economic recovery and whether or not it has begun and whether consumer spending is actually the cause. The latest sector to post positive figures is the car industry, which has seen 2013 bring in the highest level of car sales since the onset of the credit crunch.
According to the Society of Motor Manufacturers and Traders (SMMT), vehicle registrations in 2013 were 2.26 million, which represented a 10.8% increase from 2012. That’s not to say that we have returned to the heights seen pre-crisis levels, as sales still remain some way below their 2007 figure, but the data is certainly moving in the right direction. The key questions are: What’s the cause of this growth and what does it mean for the UK economy?
The economy has certainly turned a corner and perhaps consumer confidence is improving to reflect this. With consumes more optimistic about future economic prospects, more luxury items may well be purchased. During the height of the recession, many families may well have said ‘it will last’ or ‘we’ll make do’, referring to their old cars. However, this improved confidence, together with attractive finance deals may have been instrumental in convincing consumers to splash out. This is reflected in the data, which indicates that some 75% of car sales involve a finance package. One further explanation that has been offered by industry analysts is that the refunds individuals are receiving through mis-sold payment protection insurance are providing a nice contribution towards the deposit.
PPI payments will certainly dry up, but as long as attractive finance packages remain, car sales should continue. A key factor affecting affordability may be interest rates. When they increase, any variable rate loans will become more expensive to service and this may act to deter consumers. However, if the car industry helps to stimulate other sectors and wages begin to increase, the overall effect may be to sustain and even further the growth of this key economic sector. The following articles consider the car industry.
Would you start a family if you were pessimistic about the future of the economy? Buckles et al (2017) (see link below) believe that fewer of us would do so and, therefore, fertility rates could be used by investors and central banks as an early signal to pick up subtle changes in consumer confidence and overall economic climate.
