| BUSINESSWEEK ONLINE : NOVEMBER 1, 1999 ISSUE | ||||||||
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| BUSINESSWEEK INVESTOR
Consumer Clout Two household surveys give a hint of what's to come This is the fourth in an occasional series of stories explaining how major economic reports can affect the stock and bond markets. Is everybody happy? Answering that question is the aim of two major surveys on consumer attitudes about the economy. Both the consumer confidence index, compiled by the Conference Board, and the consumer sentiment index, reported by the University of Michigan's Survey Research Center (SRC), track the ups and downs of how households view the economy and their roles in it. But why is that important to Wall Street? Consumers drive the U.S. economy, and how they feel says a lot about the way growth and corporate profits will hold up. Indeed, consumers account for two-thirds of economic activity, and people who feel optimistic about their earning potential are more likely to lift their spending. What the markets fear now is that an overheated economy will rekindle inflation and lead the Federal Reserve to hike interest rates at least one more time this year. That's why the Oct. 14 retail sales report, which showed consumer spending likely grew at a robust 4% annual rate in the third quarter, caused the bond market to swoon and pushed the 30-year Treasury bond to a two-year high. Those jitters continued on Oct. 15, when a 1.1% jump in producer prices caused another down day in the markets. FIVE QUESTIONS. One thing that could stay the Fed's hand, of course, is consumers turning more cautious. As of September, both indexes showed that households are highly optimistic about the economy. If the Oct. 26 confidence report and the Oct. 29 sentiment number show that consumers remain euphoric, look for additional bad days in the markets as traders grow more depressed. ''The markets watch [consumer indexes] to see whether the economy is heating up or cooling down. And that perception translates into ideas about inflation and ultimately interest rates,'' says Lynn Franco, director of the consumer research center at the Conference Board. If you hold consumer-related stocks, the Conference Board and Michigan indexes can tell you about likely changes in the demand for your companies' products. Keep in mind, though, that household attitudes have less influence on consumer staples, such as food and clothing. But people who are confident about their economic prospects are more likely to take on the debt required for purchasing new cars, homes, and other big-ticket items. The indexes do not move in lockstep, in part because they are put together differently. Michigan's sentiment index starts with a phone interview of at least 500 adults each month, asking a broad range of questions on economic activity, inflation, interest rates, government policy, and whether now is a good time to buy a home, major appliance, or car. The sentiment index, which is a component of the Conference Board's index of leading indicators, is reported on a preliminary basis at mid-month and then as a final number at the end of each month. The Conference Board employs custom-marketing research firm NFO Worldwide to conduct a mail-in survey of 5,000 households. It asks only five questions on business activity, employment, and income prospects. The answers are used to construct one index covering the economy's present situation and one index of expectations six months ahead. The two gauges form the overall measure, which is reported at 10 a.m. on the last Tuesday of every month. Franco explains that because the two indexes are calculated in different ways, the confidence index is more volatile than the one for sentiment from month to month. But over time, they follow the same trend. You can track the indexes at www.dismal.com and www.conference-board.org. In doing so, you can get an idea of how consumers help determine the future path of the economy, interest rates, and even your portfolio's value. By KATHLEEN MADIGAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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