Secondly, confidence is emotional. As a concept it captures an array of feelings relating to optimism, pessimism, fear and hope. That a lot of feelings. And certainly a far remove from the straw man of utility maximizing home oeconomicus parodied by many of economics' critics.
Thirdly, confidence is predictive. Especially in relation to consumer behaviour - including spending, saving and borrowing. Crucially, measures of confidence can sometimes determine the near term outlook for economic recovery in recessionary times as it gauges the views of the general public about future prospects. Or lack thereof.
Though consumer sentiment indices can be used to anticipate developments 3-6 months ahead, they can also inform the longer term outlook as well. For example, Robert Shiller focuses on just one of the component questions used to create the Thomson-Reuters University of Michigan Consumer Sentiment Index. It is Question 4, namely:
“Looking ahead, which would you say is more likely – that in the country as a whole we’ll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?”Shiller's rationale, as set out recently, is as follows:
That question is usually not singled out for attention, but it appears spot-on for what we really want to know: what deep anxieties and fears do people have that might inhibit their willingness to spend for a long time. The answers to that question might well help us forecast the future outlook much more accurately.So where does the index for Q4 stand in September 2011? That's the worrying thing. It certainly has Robert Shiller worried. I've updated a chart for the Q4 Index to end 2009 with the current September 2011 index = 48. It's back to levels last seen in the 1970s and early 1980s.
In America - as in Ireland - consumer sentiment is now bound up in a narrative about debt and risk that will reverberate far beyond just the next few months. As Shiller sees it, the current, 'depression narrative' will need to be replaced with a more inspiring story. Who will do the replacing is not so clear.
Perhaps economists will have to become better storytellers?