In this NPR interview (link here) the power of the Consumer Sentiment Index is discussed. This Index was created by economist George Katon at the University of Michigan in the late 1940s. The basic idea behind the index is that emotions are an economic indicator, leading people to spend more when they are hopeful, and less when they are pessimistic.Many businesses closely watch the index to decide how much product to stock.
Here is a link for the report from U of M. Sentiment for April is at its highest since 2007.
I found it interesting to see how this Index is used by businesses. It's surprising to see how much emotions affect financial decision making. In crisis times, low sentiment often perpetuates economic shocks. Things like runs on banks/money market funds aren't as likely to happen when people are confident in the economy.
How do you think this economic indicator compares to others ( like the CPI, unemployment, GDP and others) when measuring the health of the economy?
I think this is a really interesting article and I was also surprised by how much the indicator was used by businesses. In my opinion, the economic indicator is most likely closely related to other indicators such as unemployment and CPI. I would think that if there is a large amount of price inflation or unemployment throughout the country, consumers would generally be feeling pessimistic about the economy and spending money. I do think that this economic indicator seems to be a little more attached to consumers as people, instead of just GDP and a labor force.
ReplyDeleteI agree with Bronte. This index seems very similar to the CPI and unemployment rate in terms of judging how the economy is doing. It is reassuring that it has hit its highest mark since 2007. Hopefully now that the weather is starting to get nicer the economy will pick up.
ReplyDeleteI also agree with Bronte that this index is similar to the CPI and unemployment rate in judging how the economy is doing. Also, it is interesting to me that this index sees consumers as humans and taking their emotions into consideration about the economy, instead of just a part of the overall GDP.
ReplyDeleteI agree with Bronte in that it is surprising how much businesses use the index. However it makes sense that consumers would buy most when optimistic and less when pessimistic. Another emotion that would determine consumer's purchases is security whether it is social or personal.
ReplyDeleteThis is always the fascinating side to me about economics: psychology plays a very important role in driving behaviors, creating trends, and consequently affecting the health of an economy. I think that using this index will help bring human factors into economics in a more realistic way. From what I learned from microeconomics class, we often have to assume that people participating in the economy are rational, while in fact they are not. So having such index might be able to bridge the gap between theory and reality, and clarify inappropriate assumptions.
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