The Consumer Speaks -- Should We Listen?

Most people who have heard me speak at a company or association meeting know I am not a fan of the Consumer Sentiment Index, a gauge of what consumers are expecting in the near and long term. Staffers conduct the monthly survey by calling at least 500 consumers who are asked about 50 core questions. The questions include their assessments of their personal financial situation, their buying attitudes, and their view of overall economic conditions.

I have shown in many presentations that the monthly data trend does not compare well to retail sales or general economic trends. The monthly figures do compare well to the monthly figures in the S&P500, so perhaps consumers are responding to movements in the stock market. The lack of correlation is not surprising given the sheer volume of data consumers take in on a daily basis. There is also the problem of social proof, where "everybody knows" becomes a certain fact (e.g. 83% of Americans believe we are still in recession and social proof says that many people cannot be wrong; ergo, we must be in a recession). The reality is that a majority of people can indeed be wrong about objective facts and their opinions on the matter do not change the facts. We the people can get it wrong.

However, there is a way to harness the information gathered and turn it into a reliable leading indicator. The Consumer Sentiment Index becomes a reliable leading indicator when you make it into a 12/12 rate of change. That one-step gives the Index a correlation of .72 to the U.S. Industrial Production 12/12 (.72 is a good correlation). Further, the Index 12/12 leads the US Industrial Production 12/12 by nine months. The Index 12/12 has been rising since December 2011, telling us all to expect a faster rate of rise in the U.S. economy later this year and into 2013.

Readers who have done a Trendcast should use the Index 12/12 as a leading indicator to your business. The 12/12 will allow you to take monthly noise and convert it into economic music; understanding how to harness this indicator will help you make decisions with confidence about the future of your business.