How Can Consumer Confidence Surveys Be Taken As Seriously As They Are?

For some reason, the idea popped into my head to look into how the consumer sentiment is figured. You know, those surveys done by the University of Michigan and The Conference Board which tell us what consumers feel about their situations and the economy, and which ultimately turns the markets one way or the other based upon the results. The last part is what bothers me. The fact that a simple survey can affect so many is fairly unsettling to me, and I was curious as to just who these people were that have the power to change the direction of our investments. The answer almost knocked me off of my chair.

I thought that maybe there was some scientific approach to the survey, and that the sample set would be representative of the nation as a whole, but the reality was much different. The University of Michigan and Reuters partner to publish one of the most influential pieces of economic data. The interesting part is that the procedure is to select a minimum of 500 households which will answer 50 questions designed around financial matters, and which will influence millions of people’s immediate futures. These aren’t specially designated experts or scholars, but random households. There is apparently no screening process for eligibility, so there is no way to know if the respondents will even be financially literate, or have the ability to process the information in a logical and rational manner. The Conference Board is a little broader in that it selects 5,000 households for inclusion in its survey, but that is still too small a sample to attempt to project it as snapshot of the nation.

The most interesting thing that I discovered was on the survey information section of the University of Michigan page under the description heading. A full explanation of the survey was provided, as was a series of charts comparing responses with actual events. Of course if you take the results of the survey and plaster the information on every single financial news outlet, then the rest of the people will react in a similar fashion. That is the way the economy and media works today: if you publish the information, it will be held as gospel. The problem is that sentiment is based on emotion. Emotion tends to be illogical, and therefore is the enemy of finances which are ideally supposed to be rational, cold, hard facts and figures. Once the emotions of a select few enter the picture, it essentially corrupts the data, and makes it way to the masses, thereby corrupting them as well and their actions dictate what direction the economy will go.

In fact, I will go so far as to say that these surveys do not present very reliable or fundamentally sound guidance at all. It makes me wonder why experienced and educated professional would even use this type of data at all. I would liken it to asking random people on the street about a medical condition: you don’t know what their backgrounds are to be able to answer the question but you still take their (possibly) uneducated or uninformed opinions under advisement. Especially in tough times it is imperative to use fundamentally sound data and guidance, which these types of surveys obviously cannot provide.

The funny thing is that these days whenever you turn on the television or read a periodical, the common advice is to be extremely cautious of where you get financial advice from, yet these types of unscreened, random surveys are not only allowed to have a major impact upon the economy each month when they are released, but are heavily anticipated and trusted.