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Are doubts about consumer confidence justified?

Consumer confidence has fallen by 8.3% to its lowest level in two years, according to the Westpac-Melbourne Institute Consumer Sentiment Index. The drop has been connected to speculation about the impact…

In the frame: David Jones has fallen victim of slumping consumer confidence - but is it warranted?

Consumer confidence has fallen by 8.3% to its lowest level in two years, according to the Westpac-Melbourne Institute Consumer Sentiment Index.

The drop has been connected to speculation about the impact of the carbon tax, with Treasurer Wayne Swan calling on Opposition Leader Tony Abbott to “stop scaring the consumers”.

Retailer David Jones last night issued a dramatic profit downgrade, saying it expects second-half profits to be down by 9% to 12%. The company blamed the slowdown of sales on factors such as offshore Internet retailers due to the high Australian dollar, fears about the carbon tax and the impact of the flood levy.

People were tending to save more and spend less while international uncertainty and threats of further interest rate rises was also fuelling poor consumer confidence, the company said.

But in the midst of a continuing boom, should Australians be so pessimistic about the current conditions? And exactly how are these perceptions shaped?

We asked Deakin University lecturer and consumer behaviour expert, Paul Harrison.

Is Swan right to claim consumer confidence has suffered due to Abbott’s campaign of “scaring the consumers”?

Probably the key issue to address here is how we interpret the information provided to us through something like a consumer confidence index. The reality is that we look at these metrics and assume they are absolute measures of a particular consumer response.

What is important to understand is that the measure is a result of consumers trying to interpret the range of information that is constantly being provided to them through their information sources, including the media, but also their friends and other social groups.

Any sort of confidence index is obviously subjective, but the problem is that in most cases it is presented as an objective measure, particularly when it is delivered by a politician or an economist.

If we are receptive to the message, and we are being constantly told the sky is going to fall, many people look for evidence to support it, which increases the likelihood that they are going to believe that the sky is going to fall.

Our biases influence our willingness to believe in the information being provided. So, that’s where you see the idea of consumer confidence. We don’t have the capacity to separate the rational elements from the emotional elements.

It’s no surprise people are less confident because we are constantly being told to be less confident. It’s not an absolute thing, but it is pervasive and powerful.

So it’s a reality/perception thing?

At an individual level, perception is reality.

When it comes to indexes and surveys, there is an expectation that we should have an opinion about most things, when in fact we tend to be too busy to have strong opinions until somebody tells us that we need to have one.

So, when people are surveyed, or asked to have an opinion, there is a tendency to draw upon the information most readily accessible in their memory. It’s about recall more than anything. If you look at the way that people like you are responding to a particular issue, then this makes it easier for you to form an opinion. It is not a reflection of a rational reality. It is an emotional response..

Looking at the way that news is reported, there is not a lot to feel confident about, most of the time. The role of news is to report the extraordinary, rather than the ordinary. So, news and the continuous news cycle, requires emotional stories, rather than rational stories.

If you take the emotion out of the discourse - in reality, Australia is in a really good place in comparison to the rest of the world; Europe, Asia, even the US. So, it comes back to the “risk of feelings” thesis – that our opinion is determined by our immediate emotional perception of risk today, to me, rather than any rational response to a situation.

That emotional response then has a flow-on response.

David Jones announced a profit downgrade off the back of low consumer-confidence levels. If people are fearful, they stop spending, don’t they?

Kind of. The consumer confidence index will add support to the attitudes of consumers who think that they should stop spending. And, as a quantitative measure, it provides an indication of confidence, which may lead to reduced spending. But there are other factors at play here.

I think if you stratified the data, you would actually see there are different types of people in different situations who would have a very different perspective.

Because we’re just looking at averages, basically you’re getting a broad perspective and that’s useful; but what you’re not getting is where is the confidence and where is the lack of confidence amongst the market.

So is it risky to use consumer confidence as a barometer to the health of the economy?

I don’t think it’s dangerous if it were being used as a suite of tools, but it becomes risky when it is presented as the index or monitor that everyone refers to and gets the headlines.

There is a tendency amongst politicians to exploit lay people’s innumeracy, because people are willing to accept a number or statistic that a perceived authority presents, on trust, rather than argue back. When people are confronted by numbers or statistics they are likely to suspend natural scepticism in favour of acceptance of numbers as the final authority.

This is partly due the school curriculum, which tends to teach mathematics by rote, rather than by understanding, that is, the numbers learned are meaningful because their teacher told them that they are meaningful. So, in the case of consumer response, most people (even highly educated people) are likely to assume that firstly, the numbers are accurate, and secondly, the numbers communicate the authority of the person or institute providing them.

In a way it’s the result of our need for absolute values and definitive information.

Most people don’t think about how confident they are about the economy on a day-to -day basis, unless they get asked or have some major reason to be thinking about it. Generally speaking, people get on with their very busy lives. It’s not until a politician ramps up perceptions around it and suggest that things are going to be bad that we think, “well maybe I should have an opinion”.

This constant focus on something as abstract as “the economy” is out of proportion to the way people operate on a day-to-day basis. And yet, our news bulletins are constantly telling us about the S&P500 or the FTSE. Most people in the street wouldn’t even know what a FTSE is, yet this informs our view of how confident we should be.

So is Tony Abbott’s carbon message more effective than the government’s?

People are more likely to accept a message if it fits with how they are currently seeing their world.

But this leads to a much bigger issue: in the last 15-20 years, there has been a shift in the political discourse toward a pure focus on economics and the economy as the only barometer of national performance.

Therefore, if everything is reduced to an economic measure, it is hard to understand and most people don’t have a complete or deep understanding of macro or micro economics, then we are drawn toward simple, uncomplicated and emotional measures.

So, when a politician, who you want to believe, says your life is going to be worse off and here’s why, it’s a lot easier to accept that message because it seems rational, it has to some degree numbers around it.

Even a word like tax has connotations that will change people’s perceptions, and is more readily accepted. This is probably why the government used the term Flood Levy, rather than tax. And this is why I find it curious that they continue to use the term Carbon Tax (that said, it is probably too late to change, simply because the government will be criticised for the use of “spin”).

At an individual level, if we think rationally about the carbon tax effects, being told bananas is going up 3c a kilo (when they went up nearly $10 a kilo as a result of Cyclone Yasi), is not going to have a huge effect on the way people buy bananas.

But there is also the issue of locus of control at play. We accept the pain of bananas at $14.99 a kilo because it was caused by natural phenomena. The carbon tax is something that we struggle with because we perceive that we have some level of control, because we voted in these particular politicians.

But it is scary to most people when you talk about this very amorphous thing called the carbon tax. It’s not an issue of whether the government has sold it badly. In fact, it’s more of an issue that they have spent too much time selling it, and therefore consumer confidence or lack of it has had time to fester and be picked at by the opposition.

The problem is that on top of the carbon tax benefits being poorly communicated, it’s also that we’ve had so much time to worry about it. It becomes easier for the worry to be amplified.

The bottom line is that people absorb these kind of changes into their lives reasonably quickly – the GST is a good example – but because at the moment it’s an abstract concept, it’s a lot easier to sell the negative aspects of it because generally speaking taxes come with negative connotations.

We’re all imagining how horrific our lives will be once this kind of thing is introduced. Even though the consumer confidence survey was conducted before the carbon tax was (officially) “announced”, the reality is we already had been talking about it since pretty much Abbott rolled Malcolm Turnbull for the leadership of the Liberal party.

Since that fateful day, in November 2009, Tony Abbott has been relatively successful in making the Labor Party operate in full-time election mode.