The Consumer Confidence Index (CCI) is often used as a measurement of economic progress. It’s clear that emotions influence how consumers spend money and perceive investing risks, but what does it really mean when you hear that consumers are more optimistic about the economy? The way we measure consumer confidence is by directly asking consumers how they feel. To be an accurate measure of economic health, this is based on the assumption that consumers are in touch with their own emotions and that those emotions are in line with the underlying fundamentals of the economy. While the index is no doubt a useful measure of the nation’s economic perception, it might not tell the whole story when it comes to economic strength.
The Money Anxiety Index (MAI) offers a different way of measuring our economic feelings by using various economic indicators that can be associated with consumer stress to determine the level of overall anxiety that Americans demonstrate, rather than what they report feeling. Some of the indicators the index uses to come to its conclusions are personal consumer expenditures, personal spending and savings, and gross domestic product.
What the Money Anxiety Index shows us is that we may start to change our behavior as consumers before we recognize a change in our own confidence levels, indicating a gap in how we think we feel and how our true feelings influence our actions. With a solid track record of correlation with major financial events such as the Great Recession, indices such as the MAI lead us to wonder: do economists know us better than we know ourselves?
A History of America’s Financial Anxiety
The MAI tracks data back to January 1959, and its results show a pattern of high levels of financial anxiety leading up to times of economic hardship. The index’s findings show that people change their behavior as consumers based on current economic conditions, regardless of their demographic or personal situation. And, when anxiety rises, it seems that consumers slow their spending and are more hesitant to take risks, which may help to spur impending economic downturns. The highest peak on the index, for example, came during the recession of the early 1980s and measured 135.3. On the other hand, the index’s lowest point of 38.7 came during the mid-60s, in the midst of a period of economic expansion.
These trends still hold true today. The long road of recovery since the Great Recession began in late 2007 is a great example of how Americans reactions to economic shifts are represented. Most recently, the index had showed improvement for most of 2013, meaning anxiety levels were dropping, and the first two quarters of 2014 showed a flat line as anxiety maintained its current level. In 2015, the index dropped 6 points below its 50-year average of 70.7; a 15% decrease from just 12 months ago. At least currently, Americans seem fairly content with the economy based on this index.
Economic Culture Shock
Beyond just economic predictions, the MAI has also proved to be an indicator for politics; for the 50 years prior to the 2012 presidential election, only those incumbent presidents who saw the index decline during the year of their reelection campaigns (from January to November) were able to win a second term.
While the MAI tends to have less movement month-to-month, the previously mentioned Consumer Confidence Index can be extremely volatile. This is an example of how investors emotions can get in the way of sound decision-making. More broadly, it shows the effect that emotion can have on the market.
While the anxiety and confidence indices are intriguing and measure feelings almost all Americans can relate to, they are not the first or only of their kind. The Consumer Sentiment Index is similar to the CCI with a different methodology, and the Small Business Optimism Index focuses specifically on the confidence of small business owners. The latter has historically been a predictor of forthcoming economic shifts. The Misery Index measures how “miserable” the country is based on its unemployment and inflation; the index rating is the result of adding these two numbers together. Other indices highlight links between popular culture and the economy, such as the Literary Misery Index, which calculated the frequency of words associated with joy and words associated with sadness in literature, eventually revealing a correlation of this measurement with the previous decade’s economic misery index.
So, what does it all mean?
Bottom line: we may not be as in touch with our financial emotions as we think we are. As a result, our spending and investment habits won’t necessarily align with what we say we are feeling about the economy. But, just as our feelings impact the economy, the opposite is also true. While our short-term feelings are influenced by hundreds of personal factors, whether we like it or not, the economy may hold a great deal of power over our long-term happiness. It can be difficult to accurately categorize the way we feel about complex economic issues, but the way we inherently react to them tells a clear story about the economy and its subtle yet powerful influence on our emotions and our culture.