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It's nice that U.S. consumers are gaining confidence. It's a wonderful, warm fuzzy feeling that everyone should have, like a daily hug or a swig of scotch.
But, as Bill Murray so eloquently put it in his classic film, Meatballs, it just doesn't matter.
Somehow, we've convinced ourselves that consumer confidence indicators do matter, that they provide a vital early indication of what's going to happen with consumer demand and spending – which represents roughly two-thirds of gross domestic product. Hence a certain amount of enthusiasm over last week's release of one of the most closely watched U.S. consumer-sentiment measures, the University of Michigan Consumer Sentiment Index for May, which surged to its highest reading since mid-2007. Economists were quick to argue that the growing confidence would translate to another quarter of strong growth in the personal-consumption components of GDP.
But does it? History shows only a very loose relationship between consumer confidence and personal consumption expenditures – and it's certainly no leading indicator of consumption patterns. At best, it's a coincident indicator – consumers spend at the same time they are confident, but confidence today (even in the economy's future prospects) doesn't have much bearing on consumption in the future.
"Few studies have found that confidence indexes have significant explanatory power once fundamental factors of the economy are taken into account," the Bank of Canada said in a 2002 paper. "We find that, taken on their own, confidence indexes contain relatively little information to forecast aggregate consumer spending in the United States."
At best, researchers including those at the European Central Bank have found, consumer confidence changes can be useful at times of financial shocks, helping explain sudden unexpected swings in consumption. In normal times, it seems, they aren't much help.
If consumer confidence isn't telling us much about actual consumer behaviour then, what is it telling us?
It's not particularly reflective of the turnaround in U.S. home sales and prices – which, according to common logic, is supposed to feed household wealth and, by extension, consumers' capacity to spend. Directionally, consumer confidence and housing follow a similar long-term trend, but even in particularly strong or weak housing markets, consumer sentiment can be all over the place.
Over the past several years consumer sentiment seems to have taken its cue, more than anything, from the stock market. Since the market began its recovery in early 2009, rallies in stocks have typically been followed by rallies in consumer confidence. So the latest surge in the consumer sentiment reading reflects little more than the fact that stocks have been rising.
A useful economic indicator should tell us something we didn't already know.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @ParkinsonGlobe.
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David Parkinson