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Wednesday, September 26, 2012

Some Essential Facts About Consumer Confidence in September

by Lydia Saad and Dennis Jacobe

1. Americans’ confidence in the economy is undeniably up this month. Gallup reported this on Sept. 11, Sept. 18, and Sept. 25 in our weekly updates of the Gallup Economic Confidence Index. This is also evident in the Michigan mid-month report as well as in the Conference Board’s preliminary release of September data on Tuesday, both of which showed confidence rising more than analysts predicted.

2. Because the Gallup Economic Confidence Index is based on daily tracking of consumer attitudes, we can pinpoint the day that confidence increased. That day was Sept. 4, the first night of the Democratic National Convention. After averaging -27 in August, and registering -28 on Sept. 3, the Gallup Economic Confidence Index jumped to -18 on Sept. 4, and has mostly remained at or near that improved level.

3. Because Gallup Daily tracking includes political questions as well as economic ones, we can analyze whose confidence changed in an effort to understand why it changed. The data show that the rise in confidence this month has been almost exclusively due to soaring optimism among Democrats and independents who lean Democratic.

The Economic Confidence Index among Democrats had been ambling along at around +10 from August through early September. Then, in the week ending Sept. 9, spanning the Democratic National Convention, it surged 18 points to +24 and has since averaged +20 or better. A similar pattern has occurred among Democratic leaners, with a 22-point surge in confidence during convention week. Confidence rose somewhat less sharply, up 13 points, among independents who do not lean toward either party (“pure independents”), while it has held steady at very low levels among Republicans and Republican-leaning independents.
In summary, consumer attitudes markedly improved this month, primarily among Democrats, and the shift coincided with the start of the Democratic National Convention. This raises several questions.

Did economics drive Democrats’ renewed confidence, or did politics? That’s not clear. It’s possible that the Democratic convention themes praising Obama’s economic record and laying out economic goals for a second term were effective at convincing the party faithful that the economy is not so bad and getting better. Alternatively, the sheer excitement generated by the convention may have boosted Democrats’ optimism that Obama will win re-election, and thus their economic confidence rose in kind. This is the “rising tide lifts all boats” theory for what happened at the Democratic convention.

Will increased economic confidence help Obama politically? Not necessarily, in that economic confidence rose primarily among Democrats, who would ultimately vote for Obama anyway. The improvement among “pure independents” is more important, but this group represents a relatively small sliver of Americans (about 10%), many of whom won’t vote, and their confidence rose less sharply than Democrats’.

What does it mean for the economy? While economists continue to debate the significance of economic confidence measures, Wall Street continues to see confidence as a key indicator of future consumer buying behavior. The politically driven nature of recent confidence increases suggests that the relationship between economic confidence and consumer spending should be more highly discounted than usual.

Are these numbers sustainable? Given that the apparent spark for this month’s confidence surge was the Democratic National Convention, one would have expected the effect to be relatively short-lived. The fact that Democrats’ confidence has since remained higher suggests it had a transformative effect rather than a temporary one. Barack Obama also came out of the Democratic convention with a bounce in voter support that pushed him into the lead in the presidential race, and that has likely helped maintain Democrats’ optimism about the election. In turn, this has likely led many Democrats to put a positive slant on the economic data, suggesting that even marginally positive economic data may keep Democrats’ economic confidence high.

What are the implications? Right now, politics is playing an inordinately large role in the behavioral economic data. This suggests that the period between now and the election is a particularly hazardous time to apply traditional behavioral economic and political interpretations to key economic measures.

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