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- [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.
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