Consumer expectations

What Are Consumer Expectations?

Consumer expectations refer to individuals' beliefs and outlooks regarding future economic conditions, their personal financial situations, and market trends. These forward-looking perspectives are a critical component of behavioral finance and play a significant role in shaping economic activity. They encompass a wide range of anticipated factors, including future inflation rates, job prospects, income growth, and overall economic performance. Consumer expectations are not merely passive reflections of current conditions but actively influence household spending, saving, and investment decisions, thereby impacting the broader economy.

History and Origin

The systematic measurement of consumer expectations gained prominence in the mid-20th century as economists and policymakers recognized their influence on economic cycles. Early efforts to quantify these sentiments often involved surveys designed to gauge public optimism or pessimism. One of the pioneering initiatives was the Surveys of Consumers, established at the University of Michigan, which began collecting data on consumer attitudes in the late 1940s. These surveys aimed to provide a forward-looking indicator beyond traditional economic indicators like industrial production or employment figures.

Over time, the methodology evolved, leading to more sophisticated surveys. A notable development is the Federal Reserve Bank of New York's Survey of Consumer Expectations (SCE), launched in 2013. This monthly survey collects detailed information on consumer expectations regarding inflation, household finance, and the labor and housing markets. It helps researchers and policymakers understand how these expectations are formed and how they affect consumer behavior, which in aggregate drives macroeconomic activity and influences monetary policy.¹¹ The importance of compiling high-quality data on the expectations held by economic agents has been increasingly recognized in both academic research and policymaking.¹⁰

Key Takeaways

• Consumer expectations are individuals' beliefs about future economic conditions, their personal finances, and market trends.
• They serve as a crucial forward-looking indicator for economists and policymakers.
• These expectations significantly influence consumer behavior, including spending, saving, and investment.
• Major surveys, such as those conducted by the Federal Reserve Bank of New York and the University of Michigan, systematically measure consumer expectations.
• Changes in consumer expectations can precede shifts in the broader economy, affecting everything from retail sales to housing markets.

Interpreting Consumer Expectations

Interpreting consumer expectations involves analyzing various survey results and indices to gauge the general sentiment of the public. When consumers expect their incomes to rise and unemployment to fall, they are generally more willing to spend and invest, signaling potential for stronger economic growth. Conversely, widespread concerns about future job losses, declining income, or rising prices can lead to a reduction in discretionary spending and an increase in saving, which may signal an economic slowdown.

For example, surveys often show consumers' short-term and long-term inflation expectations. If consumers anticipate higher inflation, they might accelerate purchases to beat future price increases, or they might demand higher wages, potentially contributing to actual price pressures. Policymakers at central banks closely monitor these expectations as they can influence the effectiveness of their monetary policy decisions.⁹ Similarly, expectations about credit availability and the housing market offer insights into consumers' willingness and ability to take on debt for major purchases, affecting sectors like real estate and automotive.⁸

Hypothetical Example

Consider a hypothetical country, "Diversifica," where the central bank has maintained steady interest rates for an extended period. A new monthly "Diversifica Consumer Expectations Survey" reveals that the median expectation for job availability over the next year has improved significantly, and a larger percentage of households anticipate an increase in their personal income. Additionally, expectations for housing price growth have ticked upward.

In this scenario, positive consumer expectations could lead to increased household spending on durable goods like cars and appliances, as well as a more robust housing market. Businesses, anticipating higher demand, might increase production and hiring. This self-reinforcing cycle, driven by optimistic consumer outlooks, could contribute to an acceleration in gross domestic product growth for Diversifica, demonstrating the tangible impact of collective consumer sentiment on economic outcomes.

Practical Applications

Consumer expectations are extensively used across various fields of finance and economics:

• Monetary Policy: Central banks, such as the Federal Reserve, closely monitor consumer expectations of inflation and future economic conditions to guide their monetary policy decisions. If inflation expectations rise, the central bank might consider tightening policy to prevent actual inflation from accelerating.,⁷
• Economic Forecasting: Economists and analysts use consumer expectations data as leading indicators to forecast future trends in consumer spending, investment, and overall economic growth. For instance, a sharp decline in expected income growth might signal a looming slowdown in retail sales.
• Business Strategy: Businesses utilize insights from consumer expectations to make strategic decisions regarding production levels, inventory management, pricing, and hiring. If consumers expect a strong economy, companies might expand operations.
• Investment Decisions: Investors, particularly those involved in market analysis, consider consumer expectations to anticipate shifts in equity markets, bond yields, and commodity prices. Positive consumer outlooks often correlate with bullish market sentiment.
• Government Policy: Policymakers beyond central banks also consider consumer expectations when formulating fiscal policy, such as stimulus packages or tax adjustments, to influence economic behavior. During the COVID-19 pandemic, consumer behavior significantly shifted, and government stimulus programs were implemented with the aim of supporting household spending.⁶

Limitations and Criticisms

While valuable, consumer expectations surveys and their interpretations have several limitations and criticisms. One significant challenge is that expressed expectations may not always translate directly into actual behavior. Consumers might voice optimism in a survey but remain cautious with their spending due to other unmeasured factors or uncertainties. For example, despite objective macroeconomic data indicating strong performance, consumer attitudes might remain low, a phenomenon observed after the COVID-19 pandemic.⁵,⁴ This paradox suggests that factors beyond traditional economic metrics, such as political uncertainty or social mood, can influence how consumers feel versus what objective data indicates about the economy.³

Another limitation is the potential for survey bias, depending on the sampling methodology, question phrasing, or the timing of the survey relative to major economic news. Rapidly changing events, like global crises or sudden policy shifts, can cause consumer expectations to fluctuate dramatically, making long-term forecasting difficult. Furthermore, while aggregated consumer expectations provide a broad view, they may not accurately capture the diverse experiences and outlooks of different demographic or income groups, which can have varying levels of purchasing power and economic resilience.

Consumer Expectations vs. Consumer Confidence

While often used interchangeably, consumer expectations and consumer confidence are related but distinct concepts.

Consumer expectations specifically hone in on what consumers anticipate will happen, such as future inflation rates or the unemployment rate.² Consumer confidence, on the other hand, is a more encompassing measure that assesses how consumers feel about the economy right now and their outlook for the near future, often reflecting a broader sense of optimism or pessimism. Both serve as vital tools for understanding the business cycle and consumer behavior.

FAQs

What factors influence consumer expectations?

Consumer expectations are influenced by a variety of factors, including current economic data (like jobs reports or inflation figures), personal financial experiences (e.g., job security, income changes), media reports, government policies (fiscal policy, monetary policy), and global events.

How are consumer expectations measured?

Consumer expectations are primarily measured through surveys conducted by government agencies, research institutions, and private organizations. Notable examples include the Federal Reserve Bank of New York's Survey of Consumer Expectations and the University of Michigan's Surveys of Consumers. These surveys typically poll a representative sample of households about their outlook on various economic aspects.

Why are consumer expectations important for the economy?

Consumer expectations are crucial because they directly impact consumer behavior. If consumers expect economic prosperity, they are more likely to spend, invest, and borrow, stimulating economic activity. Conversely, negative expectations can lead to reduced spending and increased saving, potentially slowing down the economy.

Do consumer expectations always align with actual economic outcomes?

Not always. While there's generally a correlation, consumer expectations can sometimes diverge from actual economic outcomes due to various reasons, including unforeseen events, delays in data perception, or psychological biases. This divergence can create a "paradox" where objective economic indicators may look strong, but consumer sentiment remains subdued.¹