This morning at 10 AM we got the latest Conference Board Consumer Confidence number, an indicator that gets widespread attention and that is generally considered one of the more important monthly metrics. But what does this data series really tell us about the economy? How well does it correlate with major economic indicators? It might seem intuitive that increases in consumer confidence correlates with improvements in income, jobs growth, retail sales, etc.
But does a quick look at correlations between consumer confidence and major economic indicators support such an assumption?
After the release of today's number, I spent some time running correlations using the Pearson Product-Moment Correlation function, which takes into account both the direction and the magnitude of each monthly change. In the past I'd relied on the simple Excel CORREL() function, but Bob Bronson of Bronson Capital Markets Research schooled me on the technique of detrending with the first differences of the logarithm of the data before applying the Excel correlation function.
My initial inquiry was the correlation between Consumer Confidence and the stock market using the S&P 500 monthly averages of daily closes as the representative of the latter. The Conference Board Consumer Confidence data goes back to June 1977. The correlation between the two over that timeframe is 29%. However, if we start the comparison in 1995, the correlation improves to 39%.
Next I tried testing the correlation to determine if the confidence data is leads or lags by various numbers of months. What I quickly found was that, as a leading or lagging indicator, the correlation falls dramatically. Consumer Confidence thus appears to be a is a modest coincident indicator for the market. Here's an overlay of the two since 1995.
What about Consumer Confidence and Major Economic Indicators?
Next I worked up the correlations between consumer confidence and the basic components of the Big Four Economic Indicators I routinely track. The adjacent table shows how well the coincident consumer confidence number correlates with Retail Sales, Industrial Production, Nonfarm Payrolls and Personal Income. Essentially these correlations are of little statistical significance, and they weren't improved by changing the relationship to leading or lagging.
I've sorted the coincident correlations for the four economic series together with the S&P 500. At the outset I thought I'd find a stronger correlation between confidence and retail sales, assuming a more confident shopper spends more. Strangely enough that was the one inverse correlation in the lot, although too small to be very significant. A better correlation exists between Consumer Confidence and Personal Income with, logically enough, nonfarm payrolls close behind. But even so, correlations in the 17% to 19% range aren't terribly compelling.
I plan to give some additional study to this subject area, among other things, broadening the array of economic series I test. Meanwhile, as interesting as the Consumer Confidence data may be, other than modestly confirming the direction of the market, it doesn't appear to tell us a great deal about the economy.