tag:theconversation.com,2011:/au/topics/consumer-sentiment-8363/articlesconsumer sentiment – The Conversation2024-01-05T16:14:55Ztag:theconversation.com,2011:article/2198582024-01-05T16:14:55Z2024-01-05T16:14:55ZConsumer confidence is rising amid gloomy economic news – here’s what that means and why it matters<figure><img src="https://images.theconversation.com/files/567594/original/file-20240102-27-kfpc1i.jpg?ixlib=rb-1.1.0&rect=23%2C39%2C5268%2C3464&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/busy-city-street-people-on-zebra-182220608">Photomika-com/Shutterstock</a></span></figcaption></figure><p>People’s confidence in the UK’s economic outlook <a href="https://www.gfk.com/press/nov-uk-consumer-confidence-stages-end-of-year-rally">improved</a> towards the end of 2023, despite continuing to battle a cost-of-living crisis. Although it has strengthened over the year to December, “consumer sentiment” as this confidence is called, is still <a href="https://www.gfk.com/press/christmas-cheer-sees-december-headline-score-up-two-points-at-22">in negative territory</a>.</p>
<p>Indeed, UK consumer price inflation remains well above the Bank of England’s 2% target and interest rates are at highs not seen since the wake of the global financial crisis in 2008?. And, of course, the outlook for the UK economy in 2024 is also <a href="https://www.theguardian.com/business/live/2023/dec/19/uk-economy-at-risk-of-hard-landing-warning-ftse-pound-eurozone-inflation-pimco">in the doldrums</a>.</p>
<p>British economist John Maynard Keynes talked about <a href="https://www.economicshelp.org/animal-spirits/">“animal spirits”</a> meaning the psychological factors that drive firm’s investment decisions. But economists also take people’s feelings into account when making predictions about the direction of the economy. So, with consumer confidence rising in spite of all of these negative indicators, what role does this kind of optimism play in economic forecasts?</p>
<p>Traditionally, when trying to gauge the country’s financial prospects, economists focused on households’ ability to consume, <a href="http://dx.doi.org/10.1111/j.1467-9957.2012.02333.x">arguing that</a> expectations of <a href="http://dx.doi.org/10.1016/j.jmacro.2004.03.001">future household income</a> are a crucial determinant of people’s current consumption. For instance, you’ll be more reluctant to splash out now if you think inflation is going to sky-rocket next year, squeezing your finances in the future. </p>
<p>But willingness to consume is also increasingly important to economists, especially during difficult times. Such “consumer sentiments” describe the psychological state of households, or people, rather than the present reality of their personal finances. When economists know people are optimistic about the economy, they assume they are more willing to spend or consume more and, if not, they are expected to save more instead.</p>
<p>In the US, consumer sentiment is tracked by the University of Michigan’s <a href="https://data.sca.isr.umich.edu/">Surveys of Consumers</a>, which is based on a monthly poll of a sample of households. UK consumer sentiment is represented by the <a href="https://www.gfk.com/products/gfk-consumer-confidence-barometer">GfK Consumer Confidence Barometer</a>, also a monthly survey of households. </p>
<p>Both measures ask people about their personal finances and their thoughts on the general economy. Participants are asked about plans for large purchases, especially durables such as white goods and cars, as well as their views about what has happened in the past year (backward-looking) and their opinion of prospects over the next year (forward-looking). The US index is more focused on households’ forward-looking views, at least with regards to the overall economy.</p>
<figure class="align-center ">
<img alt="Woman standing between two rows of new washing machines in a shop." src="https://images.theconversation.com/files/567596/original/file-20240102-19-sy2cdn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/567596/original/file-20240102-19-sy2cdn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/567596/original/file-20240102-19-sy2cdn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/567596/original/file-20240102-19-sy2cdn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/567596/original/file-20240102-19-sy2cdn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/567596/original/file-20240102-19-sy2cdn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/567596/original/file-20240102-19-sy2cdn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Economists are interested in people’s future spending plans for large items like washing machines.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/hard-decision-lady-choosing-between-two-2116392398">UfaBizPhoto/Shutterstock</a></span>
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<h2>Why are these consumer surveys so important?</h2>
<p>People’s willingness to spend money is affected by <a href="https://doi.org/10.1002/jae.2494">special or extreme events</a>. The financial crisis of 2007-08, the COVID pandemic and Russia’s invasion of Ukraine all dragged down consumer sentiment.</p>
<p><a href="http://dx.doi.org/10.1016/j.jmacro.2009.12.002">Recent research</a> also shows that good and bad news has an uneven effect on consumer sentiment. In particular, good news about the general economy will have a greater and more lasting impact than bad news.</p>
<p>In the US, for example, recent good news about jobless rates falling to the lowest point since July, together with the future prospect of lower inflation, has boosted households’ willingness to consume. After falling continually for the preceding four months, US consumer sentiment increased sharply in December. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart with line (representing consumer confidence) falling recently and then rising again in the last month." src="https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=452&fit=crop&dpr=1 754w, https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=452&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/566907/original/file-20231220-29-ibs01t.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=452&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Consumer confidence in the US economy has risen in recent months.</span>
<span class="attribution"><a class="source" href="https://data.sca.isr.umich.edu/">Author provided using data from Survey of Consumers, University of Michigan</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
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<p>The US Federal Reserve has indicated that <a href="https://www.cnbc.com/2023/12/13/fed-interest-rate-decision-december-2023.html">interest rates will be held</a> and perhaps even fall in 2024 as inflationary pressures ease. So, the outlook for an easing of inflationary pressures once recent interest rate rises take full effect seems to have had a positive effect on consumer sentiment.</p>
<h2>A gloomier outlook for the UK economy</h2>
<p>The picture in the UK is somewhat different. While inflationary pressures have eased recently, the <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/november2023#main-points">current rate</a> of 3.9% is still well above the Bank of England’s 2% target. Also, unlike the US Federal Reserve, the Bank of England is less likely to cut interest rates anytime soon, while recent data on <a href="https://www.bbc.co.uk/news/business-67690287">economic growth has been disappointing</a>. In October, the economy shrank by 0.3% and unemployment rates are currently around 4.3%, with pay growth easing.</p>
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<a href="https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart with zig-zagging line (recently), showing an upward turn most recently." src="https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=342&fit=crop&dpr=1 600w, https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=342&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=342&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=430&fit=crop&dpr=1 754w, https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=430&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/566910/original/file-20231220-17-4ord34.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=430&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Consumer confidence in the UK remains in negative territory but people are feeling more optimistic.</span>
<span class="attribution"><a class="source" href="https://www.gfk.com/press/nov-uk-consumer-confidence-stages-end-of-year-rally">Author provided using data from GfK</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
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<p>Nevertheless, consumer confidence has increased in the last two months, after a sharp fall in October. That decrease may have been due to the Gaza conflict and fears about its potential impact on the global economy.</p>
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Read more:
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<p>So, both UK and US consumers seem to feel fairly optimistic about their personal finances and the wider economy right now. The obvious common factor among the two economies is the easing of inflationary pressures, which many people will be hoping will reduce the pressures of the cost of living crisis. But even though confidence is growing, neither country is out of the woods yet when it comes to the economic outlook.</p><img src="https://counter.theconversation.com/content/219858/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Joshy Easaw received a Leverhulme Research Fellowship from October 2007 to September 2008 to study: ‘Microfoundations of how households form subjective macroeconomic expectations: The role of news’.</span></em></p>Levels of consumer confidence can signal people’s future spending plans and the likely impact on the economy.Joshy Easaw, Professor of Economics, Cardiff UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1661662021-08-26T02:06:49Z2021-08-26T02:06:49ZMood, music and money: what our Spotify playlists reveal about the emotional nature of financial markets<figure><img src="https://images.theconversation.com/files/417716/original/file-20210824-17366-1h500a7.jpg?ixlib=rb-1.1.0&rect=40%2C0%2C6646%2C1604&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>We like to think our purchase decisions are based on rational calculations and facts, but we know they are often driven by emotions, too. When we splurge on nice food, clothes or electronic gadgets, are we really thinking in terms of cost and benefit, or are we responding to stress, frustration, happiness or excitement?</p>
<p>The same can be asked of financial markets. The famous “efficient markets hypothesis” argues that stock prices are driven by rational calculations. But traders are human and humans are affected by emotions. Do these emotions feed through to the stock market? </p>
<p>Studying this question is difficult because people’s emotions aren’t observable. While emotions do manifest in observable actions, many such actions (aggressive behaviour or language, for example) are not captured by any data.</p>
<p>But what if there was a way to measure the overall mood of a country and relate that to the behaviour of financial markets? In the age of Spotify, this has become a real possibility.</p>
<p><a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3776071">Our research</a>, published in the Journal of Financial Economics, uses the music people listen to as a measure of national sentiment affecting market behaviour. It builds on the concept of a “mood congruence” — that people’s music choices reflect their mood (sad songs at funerals, happy songs at parties and so on).</p>
<p>Spotify provides aggregated <a href="https://spotifycharts.com">listening data</a> across a country, as well as an algorithm that classifies the positivity or negativity of each song. Using these inputs, we calculate “music sentiment” — a measure of a country’s sentiment as expressed by the positivity of the songs its citizens listen to.</p>
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<img alt="trading floor of New York Stock Exchange" src="https://images.theconversation.com/files/417717/original/file-20210824-23-rhgzg4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/417717/original/file-20210824-23-rhgzg4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=323&fit=crop&dpr=1 600w, https://images.theconversation.com/files/417717/original/file-20210824-23-rhgzg4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=323&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/417717/original/file-20210824-23-rhgzg4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=323&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/417717/original/file-20210824-23-rhgzg4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=406&fit=crop&dpr=1 754w, https://images.theconversation.com/files/417717/original/file-20210824-23-rhgzg4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=406&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/417717/original/file-20210824-23-rhgzg4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=406&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Rational or emotional? The trading floor of New York Stock Exchange.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<h2>How is sentiment usually measured?</h2>
<p>Investor sentiment is often defined as the general mood among investors regarding a particular market or asset. While this definition is widely accepted, it’s challenging to construct a pure measure of mood that isn’t complicated by economics. </p>
<p>Many natural measures – consumer confidence, GDP growth, unemployment, coronavirus cases and deaths – have direct economic effects. So, for example, if a high consumer confidence index sees the stock market rise, this doesn’t necessarily suggest emotions directly affect the stock market. </p>
<p>Rather, the rise could be a rational response to an improvement in the business and employment conditions the index is based on. One alternative, then, is to look for other “mood proxies” as viable indicators of national sentiment.</p>
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<p>
<em>
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Read more:
<a href="https://theconversation.com/your-spotify-history-could-help-predict-whats-going-on-with-the-economy-96305">Your Spotify history could help predict what's going on with the economy</a>
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<p>Previous research on investor sentiment has used shocks that affect the national mood but not the economy, such as the results of <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=677103">major sports tournaments</a>.</p>
<p>However, other factors may affect mood – a country could lose a sports game but also enjoy falling COVID cases. Hence our proposed alternative way of capturing the mood of individuals using national Spotify data.</p>
<h2>Using music to measure sentiment</h2>
<p>One concern with music listening data is that people may choose music to neutralise their mood rather than reflect it — listening to upbeat music to cure a downbeat mood, for example. </p>
<p>We show this is not the case. Music sentiment is more positive during sunnier and lengthening days. Research has <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=265674">already shown</a> these to be high mood periods, as are those times when COVID restrictions are lifted.</p>
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Read more:
<a href="https://theconversation.com/mood-swings-and-the-market-how-to-understand-irrational-investor-behaviour-5465">Mood swings and the market: how to understand irrational investor behaviour </a>
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<p>The novelty of our study, therefore, lies in finding a measure that reflects national mood. A citizen’s music choices reflect their mood regardless of what caused it — soccer results, COVID cases or anything else. </p>
<p>Indeed, Spotify listening data have been <a href="https://theconversation.com/your-spotify-history-could-help-predict-whats-going-on-with-the-economy-96305">shown to predict</a> consumer confidence more accurately than standard consumer confidence surveys.</p>
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<img alt="Spotify banner on New York Stock Exchange" src="https://images.theconversation.com/files/417718/original/file-20210824-16663-1h4qrx0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/417718/original/file-20210824-16663-1h4qrx0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/417718/original/file-20210824-16663-1h4qrx0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/417718/original/file-20210824-16663-1h4qrx0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/417718/original/file-20210824-16663-1h4qrx0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/417718/original/file-20210824-16663-1h4qrx0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/417718/original/file-20210824-16663-1h4qrx0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Music and markets collide: the New York Stock Exchange celebrates the IPO of streaming music service Spotify in 2018.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<h2>Stock markets overreact to sentiment</h2>
<p>Linking our sentiment measure with the stock markets, we find that higher music sentiment is associated with higher returns to a country’s stock market during the same week. It also leads to lower returns the next week, suggesting the initial reaction was a temporary one driven by sentiment.</p>
<p>One might argue these results show only a spurious correlation, similar to the “Superbowl effect” where the identity of the Superbowl winner predicts US stock markets, even though there is no rational or behavioural reason for that. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/its-the-vibe-of-the-thing-the-critical-art-of-measuring-business-and-consumer-confidence-37166">It's the 'vibe' of the thing: the critical art of measuring business and consumer confidence</a>
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<p>But we show our result holds across 40 countries and is not driven by a couple of outliers skewing the data. We also show the result is robust across asset classes. While our main results consider stocks, we also find high music sentiment is associated with greater purchases of equity mutual funds. </p>
<p>High music sentiment is also correlated with lower returns to government bonds, indicating that investors switch out of safe bonds into risky stocks.</p>
<h2>Why music sentiment matters</h2>
<p>The point of our study is not to uncover a profitable trading strategy. We do not suggest investors should calculate music sentiment and use it to predict the stock market. </p>
<p>Instead, using a novel measure that reflects national sentiment and is available in 40 countries, we want to show emotions affect the stock market. This suggests investors should be wary of their own emotions when making investment decisions. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/from-tulips-and-scrips-to-bitcoin-and-meme-stocks-how-the-act-of-speculating-became-a-financial-mania-158406">From tulips and scrips to bitcoin and meme stocks – how the act of speculating became a financial mania</a>
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<p>Our findings also imply that sentiment rather than fundamentals could drive rising stock prices – of electric vehicles or artificial intelligence products, for instance. Therefore, investors should be wary of buying into a bubble or selling in a crash.</p>
<p>Moreover, this study demonstrates the power of big data to reveal aggregate ongoing sentiment. Unlike sporting events, which are infrequent, music is enjoyed everywhere all the time. Being a universal language, music enables us to construct a comparative measure of national sentiment, in real time, around the world.</p><img src="https://counter.theconversation.com/content/166166/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ivan Indriawan receives funding from Auckland University of Technology, Faculty of Business, Economics and Law Research Grant (RP-2020). </span></em></p><p class="fine-print"><em><span>Adrian Fernandez-Perez, Alex Edmans, and Alexandre Garel do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A new study using music streaming data to measure national mood underlines how much stock markets are governed by emotion rather than rational calculation.Ivan Indriawan, Senior Lecturer in Finance, Auckland University of TechnologyAdrian Fernandez-Perez, Senior Research Fellow in Finance, Auckland University of TechnologyAlexandre Garel, Chercheur en Finance, AudenciaAlex Edmans, Professor of Finance, Academic Director, Centre for Corporate Governance, London Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1325522020-02-26T21:05:51Z2020-02-26T21:05:51ZStocks are plummeting – could coronavirus cause a recession?<figure><img src="https://images.theconversation.com/files/317444/original/file-20200226-24676-1o9m555.jpg?ixlib=rb-1.1.0&rect=5%2C52%2C3489%2C2273&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Coronavirus seems to be on a collision course with the US economy and its 12-year bull market. </span> <span class="attribution"><span class="source">AP Photo/Ng Han Guan</span></span></figcaption></figure><p>Fears are growing that the new coronavirus will infect the U.S. economy. </p>
<p>U.S stocks are headed for <a href="https://www.bloomberg.com/news/articles/2020-02-26/asia-stocks-point-to-cautious-start-on-virus-fears-markets-wrap">their worst week since the 2008 financial crisis</a>; <a href="https://www.marketwatch.com/story/what-apple-walmart-and-other-us-companies-are-saying-about-the-coronavirus-2020-02-18">companies including Apple and Walmart have been warning</a> of potential sales losses from COVID-19 and the Centers for Disease Control and Prevention <a href="https://www.nytimes.com/2020/02/25/health/coronavirus-us.html">told Americans to prepare</a> for the outbreak to spread to the United States, with unknown but potentially “bad” consequences. </p>
<p>Lately, many people have asked me, as <a href="https://www.mendeley.com/authors/37086344400/">an economist</a>, a question I haven’t heard in years: Could a virus really send the global and U.S. economies into recession – or worse? Put more pertinently, will COVID-19 trigger an economic meltdown?</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/317455/original/file-20200226-24680-7kxoms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/317455/original/file-20200226-24680-7kxoms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=475&fit=crop&dpr=1 600w, https://images.theconversation.com/files/317455/original/file-20200226-24680-7kxoms.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=475&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/317455/original/file-20200226-24680-7kxoms.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=475&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/317455/original/file-20200226-24680-7kxoms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=597&fit=crop&dpr=1 754w, https://images.theconversation.com/files/317455/original/file-20200226-24680-7kxoms.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=597&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/317455/original/file-20200226-24680-7kxoms.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=597&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Oakland Municipal Auditorium was used as a temporary hospital during the 1918 pandemic, which infected 1 in 3 people.</span>
<span class="attribution"><span class="source">Underwood Archives/Getty Images</span></span>
</figcaption>
</figure>
<h2>What a virus can do</h2>
<p>The worry is understandable; viruses are scary things. I’ve read my share of medical thrillers based on <a href="https://www.panmacmillan.com/authors/robin-cook/pandemic/9781509892938">some new virus spreading throughout the globe</a> killing millions, destroying businesses and almost ending civilization until heroes – super or not – contain it at the last minute. </p>
<p>While these are works of fiction, we only have to look back 100 years to find a real example of what an unchecked virus can do. </p>
<p>The <a href="https://theconversation.com/the-greatest-pandemic-in-history-was-100-years-ago-but-many-of-us-still-get-the-basic-facts-wrong-89841">1918-1919 influenza pandemic</a>, also known as the Spanish flu, <a href="https://www.cdc.gov/flu/pandemic-resources/1918-pandemic-h1n1.html">killed at least 50 million people</a> worldwide, with some estimates putting the number <a href="https://www.history.com/news/spanish-flu">as high as 100 million</a>. In the U.S., almost 1 of every 3 people became infected, and 500,000 died. Even for those who survived, there were numerous cases of <a href="http://content.time.com/time/health/article/0,8599,1929814,00.html">long-term physical disability</a>. </p>
<p>Fortunately, the adverse economic impacts were short-lived. With today’s more mobile and interconnected world, however, some suggest any large-scale pandemic <a href="https://www.stlouisfed.org/%7E/media/files/pdfs/community-development/research-reports/pandemic_flu_report.pdf">would be much more severe</a>, <a href="https://www.reuters.com/article/us-reutersmagazine-davos-flu-economy/flu-conomics-the-next-pandemic-could-trigger-global-recession-idUSBRE90K0F820130121">with costs in the trillions</a>.</p>
<p>To date, deaths from the coronavirus have been very small, <a href="https://www.worldometers.info/coronavirus/">totaling a little over 2,700 worldwide</a>, out of more than 80,000 known cases – or only about 3.4%. Almost all of the deaths have been in China, where the virus was first detected. Rapid actions to quarantine infected individuals have likely limited the spread.<br>
Yet even if the death rates are relatively low, the economy can still suffer. These economic impacts would likely come in four forms: shortages of products from China, reduced sales to China, a drop in consumer spending based on fears about the virus and falling stock prices. </p>
<p>Let me evaluate the potential impact of each, but bear in mind that they are all interconnected, and a drop in just one can affect the others.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/pja6bOqFKmo?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">A look at how the coronavirus could affect the U.S. economy.</span></figcaption>
</figure>
<h2>Product shortages</h2>
<p>The <a href="https://www.census.gov/foreign-trade/balance/c5700.html">U.S. imports over US$500 billion of products</a> each year from China, everything from smartphones and televisions to clothing and machine parts. Sick people in China can’t work, which means they can’t make products. Closing off parts of the country from other areas also curtails production. </p>
<p>The reduced availability of Chinese products could slow some segments of the U.S. economy, with the computer and electronics industries being the most vulnerable. For example, many smartphones sold in the U.S. are assembled in China. Although U.S. retailers have some inventory, shortages will likely appear if the pandemic persists. </p>
<p>Americans are already beginning to see some impacts: for example, in shortages of <a href="https://www.axios.com/coronavirus-threatens-drug-shortage-318c9e7b-5d92-4a5e-b992-2478023c6d01.html">dozens of drugs</a> and other medical products and longer wait times for a variety of products such as <a href="https://www.wsj.com/articles/coronavirus-cripples-supply-chains-for-many-small-u-s-businesses-11582286402">bicycles</a> and <a href="https://www.bloomberg.com/news/articles/2020-02-22/coronavirus-hobbles-supply-chains-from-watches-to-lobsters">board games</a>.</p>
<p>It’s too early to say how severe it will get, but the dependency of U.S. supply chains on China is a major concern. It shows how something like the coronavirus could become a huge problem in the modern economy.</p>
<h2>Sales may take a hit</h2>
<p>On the flip side, <a href="https://oec.world/en/visualize/tree_map/hs92/import/chn/usa/show/2017/">U.S. companies sell well over $100 billion of products</a> to China annually, with the most important being technology like computer chips and agricultural products such as soybeans.</p>
<p>These sectors have already taken a hit from the tariffs imposed by China during the <a href="https://fortune.com/2019/11/15/china-trade-war-us-farmers/">U.S.-China trade war</a> of the last two years. The recent thaw in the conflict – and a <a href="https://www.nytimes.com/2020/01/15/business/economy/china-trade-deal.html">limited deal with China</a> – had created optimism for U.S. factories and farms that increased sales were around the corner.</p>
<p>That corner may be harder to reach as a result of the coronavirus outbreak and <a href="https://www.theguardian.com/business/2020/feb/23/economic-impact-of-coronavirus-outbreak-deepens">its significant impact on the Chinese economy</a>. More U.S. companies <a href="https://www.marketwatch.com/story/what-apple-walmart-and-other-us-companies-are-saying-about-the-coronavirus-2020-02-18">are now worrying</a> about their sales to China as a result. </p>
<h2>Consumers still spending</h2>
<p>Ultimately, more than anything, the spending of consumers drives the U.S. economy, <a href="https://www.inc.com/peter-cohan/consumer-spending-is-keeping-economy-from-shrinking-but-a-new-survey-of-10000-americans-says-that-might-end-in-2020.html">accounting for roughly 70%</a> of growth. Economists, policymakers and traders will be closely watching measures of this to help them understand how worried they should be.</p>
<p>Significant declines in spending are usually the <a href="https://www.cnbc.com/2019/10/10/recession-risks-yellow-flag-consumer-spending-chart-shows-cracks.html">most direct cause of a recession</a> and often signal falling incomes and higher unemployment. But consumers also reduce spending as a result of fear – such as when they see traders panicking on Wall Street. That is, nothing actually bad has to happen to reduce spending, and this fear-induced penny pinching can have real-world consequences and even trigger a recession. </p>
<p><a href="https://www.fxstreet.com/analysis/lessons-for-us-consumer-spending-from-the-sars-outbreak-202001271649">We saw this happen</a> with the SARS virus in 2003, which resulted in 700 deaths worldwide. Consumer confidence about the future dipped, and so did spending, especially on durable products like appliances, vehicles and furniture. Fortunately, the dip was short-lived, and no recession resulted. </p>
<p>Although coronavirus-related deaths already exceed those from SARS, consumer confidence has not yet been affected. The latest data, released on Feb. 25, shows it <a href="https://www.conference-board.org/data/consumerconfidence.cfm">continued to rise in February</a>, albeit at a slower-than-expected pace and based on a survey taken before the recent stock market swoon. And measures of consumer spending like retail sales <a href="https://www.census.gov/retail/marts/www/marts_current.pdf?mod=article_inline">are also still growing</a>, if at a subdued rate. </p>
<p>Also, there could be two positive offsets from the virus that will boost consumers. One is a <a href="https://www.cnbc.com/quotes/?symbol=US10Y">reduction in interest rates</a> that has already occurred and will be welcome news for people borrowing money for a home or vehicle. Second is a <a href="https://www.cnbc.com/quotes/?symbol=@CL.1">drop in oil</a> – and, ultimately, gas – prices that will mean less money to be paid at the pump.</p>
<p>So it appears, for now, that consumers are more focused on jobs, incomes and gas prices than on COVID-19.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/317442/original/file-20200226-24659-j1a9yh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/317442/original/file-20200226-24659-j1a9yh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/317442/original/file-20200226-24659-j1a9yh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/317442/original/file-20200226-24659-j1a9yh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/317442/original/file-20200226-24659-j1a9yh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/317442/original/file-20200226-24659-j1a9yh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/317442/original/file-20200226-24659-j1a9yh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Traders are beginning to fret about the economic impact of the coronavirus outbreak.</span>
<span class="attribution"><span class="source">Spencer Platt/Getty Images</span></span>
</figcaption>
</figure>
<h2>A rocky road for stocks</h2>
<p>Lastly, let’s look at the impact on stocks. </p>
<p>One thing traders and investors <a href="https://www.bloomberg.com/opinion/articles/2019-08-05/stocks-plunge-because-markets-hate-uncertainty">absolutely do not like is uncertainty</a>. And that’s what we have right now: No one, not even me, knows how bad the outbreak will get or what the impact will be on companies, consumers and the economy. </p>
<p>Until we have a good idea of how much the virus will spread and whether containment efforts will be successful, markets could remain wobbly. The Standard & Poor’s 500 stock index has plunged more than 10% since Feb. 21, <a href="https://fortune.com/2020/02/24/longest-bull-run-malaysia-prime-minister/">ending a bull market</a> that lasted 12 years. </p>
<p>A falling stock market could affect the real economy in a number of ways, including by sapping consumer confidence and reducing their spending.</p>
<p>But just as a bout of bad news can send markets into a tailspin, a reason for optimism could cause a rebound just as fast.</p>
<h2>Brace for impact – and uncertainty</h2>
<p>For now, we’ll all – traders, companies, consumers – have to just live with uncertainty, not knowing just how bad it will get. </p>
<p>The best all of us can do is monitor the situation and take <a href="https://www.cdc.gov/coronavirus/2019-nCoV/summary.html?CDC_AA_refVal=https%3A%2F%2Fwww.cdc.gov%2Fcoronavirus%2F2019-ncov%2Fabout%2Fwhat-you-should-do.html#anchor_1580064337377">precautions to prevent its spread</a> – and be ready if it does. </p>
<p>A key measure to watch is the trend in the number of new cases reported worldwide. A reduction is often a sign the virus is running its course. However, a jump in cases could be cause for alarm, especially if the increase is large.</p>
<p>Companies and industries in the U.S. having strong ties to China or other countries with major infections could be in for a rocky road ahead, but with any luck the challenges will last weeks or months – not years. As long as U.S. consumers continue to spend, the economy will continue to expand, and there’s little risk of recession. If the stock market tumbles further, however, all bets may be off. </p>
<p><em>This article has been updated from the original version published Feb. 26.</em></p>
<p>[<em>Insight, in your inbox each day.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=insight">You can get it with The Conversation’s email newsletter</a>.]</p><img src="https://counter.theconversation.com/content/132552/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Walden does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An economist explains how a virus like COVID-19 could disrupt the US economy – and why it’s too soon to freak out just yet.Michael Walden, Professor and Extension Economist, North Carolina State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/963052018-05-09T11:06:53Z2018-05-09T11:06:53ZYour Spotify history could help predict what’s going on with the economy<figure><img src="https://images.theconversation.com/files/218265/original/file-20180509-4803-n8rhh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/chilling-digital-device-headphone-relaxation-audio-362657822?src=4lBSRy5X4pJ1Y5aAYFGScw-1-37">Shutterstock</a></span></figcaption></figure><p>The Bank of England’s chief economist, Andy Haldane, <a href="https://www.bankofengland.co.uk/speech/2018/andy-haldane-centre-for-data-analytics-for-finance-and-macro">has urged</a> his colleagues to examine the musical mood of the nation when contemplating changes to the bank’s interest rate. How could an increase in <a href="https://www.theguardian.com/business/2018/apr/30/music-downloads-can-gauge-consumer-vibe-bank-of-england">Taylor Swift downloads</a> or a decline in the popularity of rock and roll be relevant for managing the economy? </p>
<p>It all comes down to measuring economic sentiment. This is a way of gauging how people feel about the economy, which behavioural economists use to make predictions about how it will respond to different policies. For example, if people are generally pessimistic about the economy then raising interest rates might encourage them to stop borrowing and spending by so much that it harms the economy.</p>
<p>For some time, researchers have been able to measure economic sentiment by analysing the language used in large numbers of online <a href="http://dx.doi.org/10.2139/ssrn.2504147">news stories</a> and <a href="https://www.sciencedirect.com/science/article/pii/S187775031100007X">Twitter posts</a>. But recently, <a href="https://www.researchgate.net/publication/323560860_The_Rhythm_of_Markets">researchers from Claremont Graduate University</a> have shown that sentiment may be extracted from pop music top-100 lists and music platforms such as Spotify. What’s more, these new sentiment indicators are at least as useful as conventional surveys of consumer confidence.</p>
<p>The idea is that songs have an emotional component that anyone can relate to, encoded in musical attributes such as the songs’ energy, tempo and volume. Online music services such as Spotify already use these kinds of attributes to categorise songs and <a href="https://qz.com/571007/the-magic-that-makes-spotifys-discover-weekly-playlists-so-damn-good/">recommend new music</a> to users based on similar tracks they have already listened to.</p>
<p>You can also understand the emotions expressed by songs from their lyrics, depending on your cultural background. These can be analysed using the same “natural-language processing” software that is used to assess the language of news and Twitter feeds.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/218273/original/file-20180509-34027-xg3wrm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">All songs have emotional attributes.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/20-december-2015-istanbul-turkey-spotify-353400926?src=4qqUH46oIfFfHRj1t8B9Ew-1-58">Shutterstock</a></span>
</figcaption>
</figure>
<p>This can be done in a simple fashion, encoding words’ positive or negative emotional loading, or more elaborately by matching words <a href="http://saifmohammad.com/WebPages/NRC-Emotion-Lexicon.htm">to eight core emotions</a>: joy, sadness, anger, fear, disgust, surprise, trust and anticipation. The software then counts up the number of times each emotion is cued within a song’s lyrics.</p>
<p>By identifying the emotional components of the most popular songs, researchers can put together a picture of listeners’ own feelings and use this to predict economic sentiment. Running the emotion mapping exercise on all songs in a top-100 chart captures the lion’s share of new music being purchased and listened to on a month-by-month basis.</p>
<p>This is where the advantages of using “big data” from large numbers of people come to the fore. Survey results only tell you what people who have chosen to participate want you to know. Music charts, on the other hand, reflect actual consumer choices from a much wider group of people.</p>
<h2>Emotional downturn</h2>
<p>The Claremont researchers <a href="https://www.researchgate.net/publication/323560860_The_Rhythm_of_Markets">applied this technique</a> to charts from before and after the 2008 global economic crisis. They found that, after the crash, the frequency of words associated with anger and disgust increased while the frequency of words associated with trust decreased. This type of evidence strongly suggests that music consumers’ states of mind do have a bearing on what music they choose to pay for and listen to.</p>
<p>This research and Andy Haldane’s comments suggest that both the music and lyrics of popular songs can indeed be used to predict economic sentiment, and even short-term stock market movements. Streaming services such as Spotify and Apple Music are sitting on data that could help build a far more detailed map of economic sentiment than top-100 lists. Because these companies have data on individual households, we could even create sentiment indexes for different regions and groups of people (for example, based on how much they earn).</p>
<p>Calling for economists to consult the musical mood of the nation may seem somewhat surprising, bizarre even. But research suggests that the big data approach to tracking consumer sentiment really could be useful. It is just one aspect of the Bank of England’s general drive to broaden and diversify the sources of information it consults in its analyses and decision making. And that should be welcomed.</p><img src="https://counter.theconversation.com/content/96305/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The emotions associated with trends in popular music and lyrics can predict economic sentiment.Kim Kaivanto, Lecturer in Economics, Lancaster UniversityPeng Zhang, Lecturer in Economics and Finance, Guizhou Minzu UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/832112017-08-31T20:28:36Z2017-08-31T20:28:36ZFace Value: business leaders are betting we will spend more<p><em>When Australian companies report results they typically include an outlook statement from the business’ leaders, giving investors some guidance about their expectations for the future. They issue these forward-looking statements with some caution as investors might rely on them, and the law requires that they be based on “reasonable grounds”.</em></p>
<p><em>The Conversation’s <a href="https://theconversation.com/face-value-sentiment-analysis-shows-business-leaders-are-positive-about-the-year-ahead-73904">Face Value</a> uses sentiment analysis to try and determine how Australian business leaders are feeling about the future.</em></p>
<hr>
<p>A contradiction is emerging between how consumers should be feeling and what the heads of companies expect them to do. What we know about <a href="https://theconversation.com/vital-signs-it-will-take-more-than-asking-for-a-pay-rise-to-fix-australias-wages-problem-79748">low wages growth</a> and <a href="https://theconversation.com/vital-signs-that-feeling-you-get-when-the-economy-cant-be-explained-by-economic-models-82255">underemployment</a> seems to suggest households would be tightening the purse strings but the sentiment of business leaders is very positive in sectors relying on consumer spending.</p>
<p>Wages are struggling to <a href="http://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-3.23.html">keep pace</a> with the prices of the things we buy and average hours worked (per worker) have also been <a href="http://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-3.17.html">trending down</a> or flat at best. This is not a picture of robust consumer finances. </p>
<p>On top of this retailers are facing the threat of competition <a href="https://theconversation.com/amazon-poses-a-double-threat-to-australian-retailers-78534">from US giant Amazon</a>. Yet according to our analysis of the outlook of leaders of Australia’s ASX 200 companies, positivity has increased.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=567&fit=crop&dpr=1 600w, https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=567&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=567&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=713&fit=crop&dpr=1 754w, https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=713&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/184133/original/file-20170831-22218-bolg6o.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=713&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">The Conversation</span></span>
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<p>The sentiment of business leaders has remained positive and improved over the past 12 months according to our analysis. <a href="https://www.cs.uic.edu/%7Eliub/FBS/NLP-handbook-sentiment-analysis.pdf">The “polarity” score</a>, which measures whether the sentiment is positive or negative, has increased from 0.11 to 0.15 (a statistically significant improvement). </p>
<p>We also looked at how subjective these statements were and found there’s been no significant increase in how opinionated these statements are. </p>
<p>Our findings also mirror other business confidence surveys and even the Reserve Bank of Australia’s own outlook, which also paints a buoyant picture. The RBA <a href="http://www.rba.gov.au/publications/smp/2017/aug/pdf/06-economic-outlook.pdf">expects</a> growth in the economy to strengthen gradually to be around 3% in the first half of 2018. The RBA expects wage growth to gradually pick up over the next year or two and for average hours worked to increase somewhat.</p>
<p>Similarly, the <a href="https://10-acci.cdn.aspedia.net/sites/default/files/uploaded-content/field_f_content_file/auschamberwestpac2017q2_0.pdf">Westpac-AusChamber</a> Actual Composite index strengthened in June 2017, rising 1.8 points to 65.0. This factored in a strengthening in the labour market, as manufacturing firms plan to hire more workers and manufacturing wages rise. And the <a href="http://business.nab.com.au/nab-monthly-business-survey-july-2017-25783/">NAB business confidence survey</a> also reveals that business conditions and confidence are improving. </p>
<p>The positive outlook for economic growth according to the <a href="http://www.rba.gov.au/publications/smp/2017/aug/pdf/06-economic-outlook.pdf">RBA</a> is driven by resource exports notably iron ore and liquid natural gas (LNG) production, household consumption including retail sales, and non-mining business investment. The RBA also expects wage growth to soon pick up.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1561&fit=crop&dpr=1 600w, https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1561&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1561&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1962&fit=crop&dpr=1 754w, https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1962&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1962&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<p>These drivers are reflected in our sentiment analysis. Business leaders in ASX categories relying on household spending, have stronger than average positive outlook on the future, with an average score of 0.18.</p>
<p>This was led by businesses like JB HiFi (0.41), TabCorp (0.23) and Flight Centre (0.18); and also consumer staples led by Ardent Leisure (0.50), Treasury Wine Estates (0.38) and Coca-Cola Amatil (0.18).</p>
<p>The outlook for manufacturing is also positive due to a range of factors such as infrastructure spending by governments, stronger world growth, and improved international competitiveness due to a lower currency, commercial construction and home building, according to the <a href="https://10-acci.cdn.aspedia.net/sites/default/files/uploaded-content/field_f_content_file/auschamberwestpac2017q2_0.pdf">Westpac-AusChamber</a> index. This is supported by our analysis which found stronger than average sentiment from business leaders in the materials sector (0.17), through companies such as Amcor (0.26).</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=788&fit=crop&dpr=1 600w, https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=788&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=788&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=990&fit=crop&dpr=1 754w, https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=990&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=990&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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</figure>
<p>But the outlook isn’t all positive among our business leaders. Sentiment was weaker than average in utilities (0.07) led by AGL (-0.03). This is hardly surprising given the high uncertainty around energy policy – AGL for example owns coal-fired power plants. Also sentiment was somewhat weaker (0.13) than average among industrial company leaders, the sentiment in Qantas’ outlook was negative (-0.03) and property/real estate company Lend Lease (0.09) was also weak.</p>
<p>Perhaps the gloomy slow wage growth and underemployment will catch up to the more positive sentiment on consumer goods and services in company reports. Or this contradiction might simply reflect the high uncertainty in the global environment. </p>
<p>Consumers certainly seem a little confused: the weekly ANZ-Roy Morgan Consumer confidence Index <a href="http://www.theaustralian.com.au/news/latest-news/consumer-confidence-bounces-but-still-weak/news-story/2fd06c35ac402ece43723cd00ce48538">ticked up</a> slightly last week but has <a href="http://www.roymorgan.com/morganpoll/consumer-confidence/consumer-confidence">jumped around</a> in recent months. Certainly the positive sentiment from business leaders about consumer spending we see in company reports seems optimistic.</p><img src="https://counter.theconversation.com/content/83211/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest has previously received funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Ben Hachey is an employee of Red Marker. Ben has received funding from the Australian Research Council, the Capital Markets CRC and Google. He is Secretary of the Australasian Language Technology Association.</span></em></p>The sentiment of business leaders has remained positive and improved over the past 12 months according to our analysis.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityBen Hachey, Honorary Associate, School of Information Technologies, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/807212017-07-13T01:53:50Z2017-07-13T01:53:50ZCherishing stuff with a photo can help you let go of it<figure><img src="https://images.theconversation.com/files/177952/original/file-20170712-19701-1952jks.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Years from now, she'll probably be ready to part with her photo assistant.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/little-child-photographer-taking-photo-her-381904279">Angela Waye/Shutterstock.com</a></span></figcaption></figure><p>Picture your favorite childhood stuffed animal. Are you clinging to it even though neither you nor anyone else in your household has played with that creature in years?</p>
<p>If so, you’re not alone. Parting with possessions we don’t need is a struggle for many Americans. We have an average of at least <a href="http://www.businesswire.com/news/home/20070426005614/en/Average-U.S.-Household-50-Unused-Items-Worth">50 unused items in our homes</a>, including clothing, electronic devices and toys. Just as common: our desire to ditch this excess baggage, which has fired up the market for <a href="https://www.nytimes.com/2016/07/10/magazine/marie-kondo-and-the-ruthless-war-on-stuff.html">Marie Kondo’s best-selling books</a>, <a href="https://www.sparefoot.com/self-storage/blog/7525-decluttering-blogs-to-follow/">blogs</a> and a <a href="https://www.realsimple.com/home-organizing/organizing/professional-organizers">magazine called Real Simple</a> devoted in part to helping people ditch their clutter.</p>
<p>As consumer psychologists, we wanted to know why people have so much trouble parting with possessions they no longer use. To gain some insight, we zeroed in on items with sentimental value in a series of studies recently published in the <a href="https://doi.org/10.1509/jm.16.0311">Journal of Marketing</a>. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/qxG25DkiF88?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">An old pair of basketball shorts, acquired in junior high school, inspired this research.</span></figcaption>
</figure>
<h2>Storing memories</h2>
<p>Things that are tied to <a href="http://www.theminimalists.com/sentimental/">emotionally significant memories</a> may represent a piece of your identity. When you struggle to part with that jersey you wore on the junior varsity basketball team, for example, you are not really clinging to the shirt itself. Instead, you’re hanging onto the memories represented by that now-tattered item of clothing you probably won’t wear again. Its sentimental value may make giving the jersey away feel like giving up a piece of your own identity.</p>
<p>We set out to test ways to help people donate goods that are meaningful to them. In studies conducted online and in person, we found that participants reported that they would experience less identity loss from donating a cherished item if they had photographed it or preserved the memory of it some other way.</p>
<p>Initially, in an online study, we let our subjects choose how to handle this. Nearly two out of three opted for photography, by far the most popular method. The other most common techniques included creating a scrapbook page or making a video about it – the approach taken by 22 percent of our participants – and writing a note or making a journal entry – selected by 13 percent.</p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/177953/original/file-20170712-19649-xoe1ks.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/177953/original/file-20170712-19649-xoe1ks.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/177953/original/file-20170712-19649-xoe1ks.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=436&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177953/original/file-20170712-19649-xoe1ks.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=436&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177953/original/file-20170712-19649-xoe1ks.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=436&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177953/original/file-20170712-19649-xoe1ks.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=548&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177953/original/file-20170712-19649-xoe1ks.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=548&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177953/original/file-20170712-19649-xoe1ks.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=548&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">People can have trouble discarding stuff they don’t use any more because of the memories associated with those items.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-girl-playing-stuffed-animal-teddy-301530881">Angela Waye/Shutterstock.com</a></span>
</figcaption>
</figure>
<p>Given how easy smartphones make digital photography, our results perhaps should come as no surprise. Many of us already rely on our phones to “<a href="http://fortune.com/2015/07/21/smartphone-memory/">remember</a>” all kinds of information, ranging from birthdays to where we have parked our cars.</p>
<h2>Saving sentiments</h2>
<p>The findings supported <a href="https://doi.org/10.1509/jm.16.0311">our theory</a> that photographs can preserve the memories tied to sentimental items and make people more likely to donate them. In other words, people don’t want these things – they just want to keep the memories they represent intact. When grownups capture the memories they associate with their favorite stuffed animal in a photograph, they often stop fearing they will lose those memories and feel free to let go of the item.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/177947/original/file-20170712-19642-1s2fdlq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/177947/original/file-20170712-19642-1s2fdlq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/177947/original/file-20170712-19642-1s2fdlq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=788&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177947/original/file-20170712-19642-1s2fdlq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=788&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177947/original/file-20170712-19642-1s2fdlq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=788&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177947/original/file-20170712-19642-1s2fdlq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=991&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177947/original/file-20170712-19642-1s2fdlq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=991&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177947/original/file-20170712-19642-1s2fdlq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=991&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Flyer the researchers distributed for this study.</span>
<span class="attribution"><span class="source">Rebecca Walker Reczek, Julie Irwin and Karen Winterich</span></span>
</figcaption>
</figure>
<p>To test whether photographing objects with sentimental value actually increases donations, we studied the behavior of <a href="http://www.psu.edu/">Pennsylvania State University</a> students. First, we placed signs <a href="http://sites.psu.edu/trash2treasure/">for a donation drive</a> for discarded stuff at the end of the school year in eight dorms housing a total of more than 800 male and female undergraduate students. In four dorms, the signs suggested that students photograph items with sentimental value that they no longer used before donating them. The rest had signs that just solicited donations.</p>
<p>Students who were encouraged to photograph things before giving them away donated 35 percent more items than in the dorms where they didn’t get that prompt. We tallied 1,098 items donated in the dorms where students were encouraged to shoot photos of their stuff, versus 815 items in the other dorms.</p>
<p>We repeated this exercise at the end of the fall semester in six all-female dorms about the same size as the prior study. Though fewer than half of the students were moving out, the rate of donation was still 15 percent higher in the dorm where they saw the suggestion about photographing items of sentimental value – a statistically significant difference.</p>
<p>We also conducted research outside a university setting by asking donors dropping off items at a <a href="https://www.svdpusa.org/">St. Vincent de Paul</a> thrift store near the Penn State campus to see if any of the stuff they were donating had sentimental value. About half of the donors dropping off items with sentimental value received pictures of their donated goods that our research assistants snapped with a Polaroid-style instant camera while the other half did not get a picture.</p>
<p>Afterward, we asked these donors whether they felt like they had lost a piece of themselves when parting with their items. Those who got the photos reported significantly less identity loss, suggesting that the photography truly helped them purge.</p>
<p>Taken together, our studies suggest that shooting pictures can help people get rid of possessions with sentimental value.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/177948/original/file-20170712-10278-90yslt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/177948/original/file-20170712-10278-90yslt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/177948/original/file-20170712-10278-90yslt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177948/original/file-20170712-10278-90yslt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177948/original/file-20170712-10278-90yslt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177948/original/file-20170712-10278-90yslt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=452&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177948/original/file-20170712-10278-90yslt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=452&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177948/original/file-20170712-10278-90yslt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=452&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">These are some of the things the Penn State students who participated in this clutter-reduction study gave away.</span>
<span class="attribution"><span class="source">Karen Winterich</span></span>
</figcaption>
</figure>
<h2>Other clutter</h2>
<p>Our findings also suggest that photography is no universal cure for clutter. </p>
<p>For example, when we asked people in our studies to take pictures of these items before selling them, that action didn’t help. The idea of placing monetary value on these things appeared to turn them off, as <a href="http://www.sciencedirect.com/science/article/pii/S1057740805700875">previous research</a> suggests it might. One possible explanation: consumers are reluctant to monetize cherished possessions. </p>
<p>Participants were reluctant to sell sentimental items regardless of whether they were prompted to photograph them or not. </p>
<p>Similarly, we found that shooting photos of stuff lacking sentimental value didn’t make people more likely to get rid of it. We believe that was because the pictures didn’t preserve emotionally significant memories. Consumers often keep things without sentimental value out of a desire <a href="https://doi.org/10.1016/j.jcps.2011.05.003">to be frugal</a>.</p>
<p>Of course <a href="http://www.amazinggoodwill.com/donating/donor-guidelines">charities won’t take</a> everything people should discard, including that worn-out teddy bear in your attic. Although we didn’t look into whether photography makes it easier for people to chuck stuff with sentimental value, we suspect that it wouldn’t work. Trashing prized possessions could feel too much like throwing out the memories that photos of them would help preserve.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/177954/original/file-20170712-19675-1p7mhq1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/177954/original/file-20170712-19675-1p7mhq1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/177954/original/file-20170712-19675-1p7mhq1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177954/original/file-20170712-19675-1p7mhq1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177954/original/file-20170712-19675-1p7mhq1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177954/original/file-20170712-19675-1p7mhq1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177954/original/file-20170712-19675-1p7mhq1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177954/original/file-20170712-19675-1p7mhq1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Americans tend to have too much clutter in their homes, but having this much luggage would be unusual.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/many-travel-bags-133004567">keattikorn/Shutterstock.com</a></span>
</figcaption>
</figure>
<h2>The takeaway</h2>
<p>Many nonprofits like <a href="http://www.goodwill.org/donate-and-shop/donate-stuff/">Goodwill</a> depend on donations of all kinds. But some specialize in attire that is bound to have some sentimental value. <a href="http://www.beccascloset.org/">Becca’s Closet</a>, a charity that distributes used prom dresses, and <a href="https://www.dressforsuccess.org/">Dress for Success</a>, which gives secondhand professional clothing away to low-income women, are two good examples.</p>
<p><a href="https://doi.org/10.1509/jm.16.0311">Our research</a> suggests that charities like those could glean more donations by encouraging people to photograph meaningful items as they purge their closets.</p>
<p>If you, like most Americans, have dozens – if not hundreds – of surplus things, you should try this yourself. Letting others benefit from your stuff will extend its usefulness while helping them <a href="https://www.greenamerica.org/green-living/finding-new-life-old-clothes">save money</a>. Besides, you’ll surely feel happier in a <a href="http://www.expertrain.com/blog/happiness/why-cleaning-is-good-for-you.htm">less cluttered home</a>.</p><img src="https://counter.theconversation.com/content/80721/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Karen Winterich is affiliated with the Alzheimer's Association. This association does not represent a conflict of interest for this research.</span></em></p><p class="fine-print"><em><span>Julie Irwin and Rebecca Walker Reczek do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Most Americans cling to things with sentimental value that we no longer need. Taking pictures of these possessions may make it easier to give them away.Karen Winterich, Associate Professor of Marketing, Frank and Mary Smeal Research Fellow, Penn StateJulie Irwin, Marlene and Morton Meyerson Centennial Professor of Business, Department of Marketing and Department of Business, Government and Society, The University of Texas at AustinRebecca Walker Reczek, Associate Professor of Marketing, The Ohio State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/688042017-01-08T19:23:04Z2017-01-08T19:23:04ZWhy and how do we measure what consumers feel?<figure><img src="https://images.theconversation.com/files/151156/original/image-20161221-13168-fbalen.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's important to know what consumers are thinking and feeling.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>How we track our economy influences everything from government spending and taxes to home lending and business investment. In our series <a href="https://theconversation.com/au/topics/the-way-we-measure-34466">The Way We Measure</a>, we’re taking a close look at economic indicators to better understand what’s going on.</em></p>
<hr>
<p>Consumers are key players in the economy, they purchase goods and services, supply labour and make savings and investment decisions. Hence, their sense of what’s happening in the economy has a flow on effect.</p>
<p>If they feel confident, they might spend a bit extra or go into debt. If they don’t, they won’t leave their job to start a risky venture.</p>
<p>Surveying how consumers feel, then, can provide a useful snapshot of how an economy is faring right now, and in the near future.</p>
<h2>The survey</h2>
<p>The idea that consumer confidence - optimism or pessimism – is important for real activity dates back to the Great Depression and John Maynard Keynes. The <a href="http://www.sca.isr.umich.edu">University of Michigan Survey of Consumers</a> – the first of its kind, was designed in 1946 to track changes in consumer confidence. </p>
<p>The <a href="https://www.melbourneinstitute.com/macro/CASiE/">Australian version</a> of the Michigan survey – the Melbourne Institute Consumer Attitudes, Sentiments and Expectations (CASiE) survey began in March 1973. The sample size comprises 1,200 households and is sorted by age, gender and state so that it is representative of the Australian population. </p>
<p>The CASiE survey contains five core questions. Consumers are asked about:</p>
<ol>
<li>their family finances compared to 12 months ago</li>
<li>their expected family finances in the next 12 months</li>
<li>expected economic conditions in the next 12 months</li>
<li>expected economic conditions in the next five years</li>
<li>whether it is good/bad time to buy major household items. </li>
</ol>
<p>The answers are ordinal, such as “better-off”/“good”, “same”, “worse-off”/“bad” or “don’t know”. </p>
<p>The responses to these five questions are used to construct five component indexes, one for each question. The <a href="Westpac-Melbourne%20Institute%20Consumer%20Sentiment%20Index">Westpac-Melbourne Institute Consumer Sentiment Index</a> is a simple average of these five component indexes. 100 is the neutral mark, a value greater than 100 indicates that optimism outweighs pessimism and vice versa. </p>
<h2>What the survey shows us</h2>
<p>Since its introduction, the Westpac-Melbourne Institute Consumer Sentiment Index has served as a reliable and timely indicator of economic activity in Australia. Swings in consumer sentiment, as displayed in this first chart, have proven valuable in signalling major turning points in the Australian business cycle such as the early 1980s and 1990s recessions.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/149189/original/image-20161208-31364-hnlzcu.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/149189/original/image-20161208-31364-hnlzcu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/149189/original/image-20161208-31364-hnlzcu.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=303&fit=crop&dpr=1 600w, https://images.theconversation.com/files/149189/original/image-20161208-31364-hnlzcu.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=303&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/149189/original/image-20161208-31364-hnlzcu.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=303&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/149189/original/image-20161208-31364-hnlzcu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=381&fit=crop&dpr=1 754w, https://images.theconversation.com/files/149189/original/image-20161208-31364-hnlzcu.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=381&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/149189/original/image-20161208-31364-hnlzcu.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=381&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Note: Grey areas indicate Australian recessions. Source: Melbourne Institute.</span>
<span class="attribution"><span class="source">Westpac-Melbourne Institute Consumer Sentiment Index</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Importantly the consumer sentiment index embed both coincident and leading information about current and future real economic activity. In particular, the index relating to family finances over the previous 12 months is a timely indicator of changes in real consumption patterns. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/149191/original/image-20161208-31405-1cufqge.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/149191/original/image-20161208-31405-1cufqge.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/149191/original/image-20161208-31405-1cufqge.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=286&fit=crop&dpr=1 600w, https://images.theconversation.com/files/149191/original/image-20161208-31405-1cufqge.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=286&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/149191/original/image-20161208-31405-1cufqge.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=286&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/149191/original/image-20161208-31405-1cufqge.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=360&fit=crop&dpr=1 754w, https://images.theconversation.com/files/149191/original/image-20161208-31405-1cufqge.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=360&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/149191/original/image-20161208-31405-1cufqge.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=360&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Note: Grey areas indicate Australian recessions. Source: Melbourne Institute. Smooth series are defined as 4-quarter moving averages.</span>
<span class="attribution"><span class="source">Index relating to Family Finances last 12 months vs Real Consumption Growth (smoothed series)</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Meanwhile, the expectations index, constructed as an average of three forward-looking components (relating to family finances over the next 12 months, economic conditions over the next 12 months and the next five years), appears to be a reliable indicator of future real activity. For example, it has consistently foreshadowed important changes in Australian labour market conditions.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/149190/original/image-20161208-31383-d1nd3g.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/149190/original/image-20161208-31383-d1nd3g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/149190/original/image-20161208-31383-d1nd3g.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=322&fit=crop&dpr=1 600w, https://images.theconversation.com/files/149190/original/image-20161208-31383-d1nd3g.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=322&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/149190/original/image-20161208-31383-d1nd3g.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=322&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/149190/original/image-20161208-31383-d1nd3g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=405&fit=crop&dpr=1 754w, https://images.theconversation.com/files/149190/original/image-20161208-31383-d1nd3g.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=405&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/149190/original/image-20161208-31383-d1nd3g.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=405&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Note: Grey areas indicate Australian recessions. Source: Melbourne Institute. Smooth series are defined as 4-quarter moving averages.</span>
<span class="attribution"><span class="source">Expectations Index vs Employment Growth (smoothed series)</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>Changes</h2>
<p>Over its long history, the CASiE survey has also evolved gradually to keep up with changes in technology and demographics. Traditional face-to-face interviews were replaced with telephone interviews in the early 1990s and online surveys have been recently introduced to complement telephone ones. </p>
<p>The decreasing cost of internet usage and the increasing influence of personal mobile devices, such as smartphones and tablets, appear to have improved the flow of information. With easier and faster access to news, consumers appear to be more informed about current affairs. </p>
<p>The average proportion of interviewees replying “don’t know” to the five survey questions used to be around 9% during the 1990s and through to the mid-2000s. This proportion, however, has declined gradually since the introduction of smartphones in 2007 and recently has plateaued to around 3%. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/149192/original/image-20161208-31367-39fkok.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/149192/original/image-20161208-31367-39fkok.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/149192/original/image-20161208-31367-39fkok.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=342&fit=crop&dpr=1 600w, https://images.theconversation.com/files/149192/original/image-20161208-31367-39fkok.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=342&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/149192/original/image-20161208-31367-39fkok.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=342&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/149192/original/image-20161208-31367-39fkok.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=429&fit=crop&dpr=1 754w, https://images.theconversation.com/files/149192/original/image-20161208-31367-39fkok.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=429&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/149192/original/image-20161208-31367-39fkok.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=429&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Note: Vertical lines indicate Australian Federal Elections. Source: Melbourne Institute. Trend series is computed using Hodrick-Prescott filter.</span>
<span class="attribution"><span class="source">Proportion of ‘Don’t Know’ Respondents</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>In the future, new innovations and advances in information technology will likely help reduce the cost even more. But increasing the frequency of surveys may not be beneficial as they will likely capture more randomness. Research about how people form expectations suggests consumers tend to update their expectations every six to twelve months and most consumers’ current and future family financial conditions are unlikely to change on a weekly or daily basis. </p>
<p>Over the years, the consumer sentiment index has attracted the attention of policy makers, market economists and academics, mainly because it is a useful signal about future household consumption and saving. Since the household sector is the largest sector in the economy, it is no wonder the Index receives a lot of attention as large swings in consumer confidence are often followed by large swings in real activity.</p><img src="https://counter.theconversation.com/content/68804/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Viet Nguyen does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Economists have been tracking how consumers feel for decades now. But what does it all mean?Viet Nguyen, Senior Research Fellow in Applied Macroeconomics, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/563492016-07-06T01:31:27Z2016-07-06T01:31:27ZExplainer: why stock market panic can signal a good time to buy<figure><img src="https://images.theconversation.com/files/115238/original/image-20160316-8453-1qzdwrb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Difficult to measure, easy to see.</span> <span class="attribution"><span class="source">Tom Simpson/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>Financial markets around the world are responding to current political uncertainty in both Australia and the UK by sending stocks, bonds and currencies on a rollercoaster ride. </p>
<p>The far-reaching implications of Brexit caused the <a href="http://www.asx.com.au/products/sp-asx200-vix-index.htm">S&P/ASX 200 volatility index (A-VIX)</a> to spike to the highest level since the start of 2016. Similarly, the A-VIX jumped 5% in the opening minutes of trading on Monday after it became clear the federal election would remain unresolved. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/129164/original/image-20160704-19113-16j84nk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/129164/original/image-20160704-19113-16j84nk.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=451&fit=crop&dpr=1 600w, https://images.theconversation.com/files/129164/original/image-20160704-19113-16j84nk.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=451&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/129164/original/image-20160704-19113-16j84nk.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=451&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/129164/original/image-20160704-19113-16j84nk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/129164/original/image-20160704-19113-16j84nk.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/129164/original/image-20160704-19113-16j84nk.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Investor sentiment (A-VIX) responding to political uncertainty.</span>
</figcaption>
</figure>
<p>The VIX essentially gives an indication as to the market expectation of price volatility over the next 30 days. Since the main participants in the option market tend to be investors seeking protection against declining prices, the VIX tends to rise when investors are anxious about falling markets – giving rise to the colloquial term of the “fear gauge”.</p>
<h2>Why investor sentiment is important</h2>
<p>In theory, asset values should be determined by competition among rational investors. Such competition makes for prices that reflect “fundamental” values - basically the discounted value of expected cash flows. But in reality we know this is not always the case. For instance, based on the discounted value of rental income, the <a href="http://www.economist.com/blogs/dailychart/2011/11/global-house-prices">Australian housing market</a> is currently far above fundamental value. Essentially, “sentiment” reflects the irrational behaviour that pushes prices away from the underlying fundamentals.</p>
<p>The uninformed traders who exhibit this irrationality are often called “noise” traders, and theory suggests that over time they will lose sufficient capital to be forced out of the market. The trouble is, constraints can mean that even the most informed trader could become insolvent before the market reflects fundamental values. With this in mind, it is important to understand what sentiment is, how we can measure it, and how it might impact asset prices.</p>
<p>The theory on investor sentiment suggests that positive sentiment will drive prices above fundamental value and provide above average returns in one period. In the next period, the misvaluation will be corrected. So periods of positive sentiment are followed by periods of below average returns, and vice-versa. That is the theory, but how can we empirically test it?</p>
<h2>A self-fulfilling prophecy</h2>
<p>A major issue that we have is that sentiment cannot be directly observed, and so we have to use alternate measures as a proxy. A number of alternatives have been suggested, these are often based on surveys (such as <a href="http://www.nber.org/papers/w10794">consumer confidence</a>) or market variables (such as <a href="https://www.researchgate.net/publication/229766916_SP_futures_returns_and_contrary_sentiment_indicators">trading positions</a>) with varying degrees of success in explaining market movements. </p>
<p>A further complication in researching the effect of sentiment is that it is often difficult to disentangle sentiment from market movements as they are often self-reinforcing. To think of why this may be, consider <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2007.01232.x/full">media reporting</a> of movements in the stock market. If the stock market goes up, then the media writes glowing reports and this entices additional “noise” traders into the market. More shares are bought, pushing prices higher, and producing further positive media commentary. This can often continue until we are in bubble territory.</p>
<h2>Two important proxies for investor sentiment</h2>
<p>Aside from volatility indices like the VIX, there is also a <a href="http://people.stern.nyu.edu/jwurgler/papers/wurgler_baker_cross_section.pdf">composite index</a> that uses the principal components of six individual proxies related to market activity (this includes share turnover and the number of IPOs). </p>
<p>The researchers that developed this index used it to explain stock returns over a lengthy period running from 1963. They found that investor sentiment had a greater effect on stocks in small, young, and high-growth firms. The index data is available <a href="http://pages.stern.nyu.edu/%7Ejwurgler/main.htm">here</a>, but ends in 2010. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/115221/original/image-20160316-8497-16mk3ir.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/115221/original/image-20160316-8497-16mk3ir.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/115221/original/image-20160316-8497-16mk3ir.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=342&fit=crop&dpr=1 600w, https://images.theconversation.com/files/115221/original/image-20160316-8497-16mk3ir.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=342&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/115221/original/image-20160316-8497-16mk3ir.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=342&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/115221/original/image-20160316-8497-16mk3ir.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=429&fit=crop&dpr=1 754w, https://images.theconversation.com/files/115221/original/image-20160316-8497-16mk3ir.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=429&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/115221/original/image-20160316-8497-16mk3ir.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=429&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Relationship between Baker Wurgler sentiment index and stock market returns.</span>
</figcaption>
</figure>
<h2>What the research says about sentiment and returns</h2>
<p>Research has shown that VIX and stock prices have a strong <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1296743">contemporaneous relationship</a>, where VIX increases as stock prices fall. Perhaps more importantly, VIX is also useful in <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2186267">forecasting</a> price movements in future periods. </p>
<p>When investor fear is high, stock prices are pushed below fundamental values. In the next period, when the level of risk aversion reverts to some norm, stock prices move back towards the equilibrium level and generate above average returns. This fits well with the underlying theory of investor sentiment.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/115222/original/image-20160316-8460-7egs06.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/115222/original/image-20160316-8460-7egs06.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/115222/original/image-20160316-8460-7egs06.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=342&fit=crop&dpr=1 600w, https://images.theconversation.com/files/115222/original/image-20160316-8460-7egs06.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=342&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/115222/original/image-20160316-8460-7egs06.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=342&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/115222/original/image-20160316-8460-7egs06.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=429&fit=crop&dpr=1 754w, https://images.theconversation.com/files/115222/original/image-20160316-8460-7egs06.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=429&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/115222/original/image-20160316-8460-7egs06.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=429&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Relationship between investor fear and stock market returns.</span>
<span class="attribution"><span class="source">Data sourced from DataStream</span></span>
</figcaption>
</figure>
<p>Interestingly, investor fear in the stock market is also informative for returns in <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2712558">currency markets</a> and <a href="http://www.sciencedirect.com/science/article/pii/S1544612316300228">bond markets</a>, suggesting that the effect of sentiment is pervasive across asset classes. And sentiment also effects the way in which markets respond to news events, such as economic data releases, with stronger, more volatile responses tending to occur when investor sentiment is low (alternatively, fear is high).</p>
<h2>Political uncertainty can drive sentiment</h2>
<p>Right now many investors are unsure about how government policy will impact them directly, via taxation and superannuation reform, and indirectly through the effect of policy (or lack of policy) on business investment decisions. </p>
<p>For many investors, this remains a time to be cautious. However, history has shown that the best returns are often to be found by buying when investor fear is at its highest.</p><img src="https://counter.theconversation.com/content/56349/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lee Smales does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Understanding fear is a useful tool for any investor.Lee Smales, Senior Lecturer, Finance, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/586372016-05-13T04:08:52Z2016-05-13T04:08:52ZConsumers feel glum about the budget, but will it matter at the voting box?<p>Australians, so far, appear not to have been convinced by the Coalition’s ‘jobs and growth’ pitch in the 2016 federal budget. But it’s far from clear how this negative reaction may impact on the fortunes of either party in the current election campaign. </p>
<p>Using information from the Westpac-Melbourne Institute Consumer Sentiment Index (CSI), we have analysed how Australians have reacted to the last six federal budgets – the three handed down by Labor Treasurers in 2011-2013, and the three by Liberal Treasurers in 2014-2016. </p>
<p>Comparing the reading of the CSI before and after the release of the Budget, we found it dipped by 4.4% following the release of the 2016 budget. But somewhat surprisingly, our research indicates voting intentions appear to be irrelevant when it comes to how people respond to budgets.</p>
<p>The Westpac-Melbourne Institute Consumer Sentiment Survey is a monthly representative survey of 1200 consumers across Australia. In May each year, the survey is carried out during the week of the budget release. We analysed the CSI in May, before and after the Budget announcements for the last six budgets. </p>
<p>Overall, we found four out of the six Budgets were not well received, with consumer sentiment declining most substantially by 9.6% in 2014, by 6.1% in 2012, by 4.0% in 2011 and it was negative again this year (see the figure below). </p>
<p>Positive reactions were registered in 2013 and 2015 with the consumer sentiment index rising post Budget announcement (compared to the pre-Budget reading) by 3.4% and 0.7%, respectively.</p>
<iframe src="https://datawrapper.dwcdn.net/qLkwT/1/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="400"></iframe>
<p>The figure below gives the changes in the index pre- and post-Budget day: </p>
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<p>Not surprisingly these reactions are a direct consequence of perceived gains or losses by consumers. The <a href="http://www.budget.gov.au/2013-14/">2013 Budget</a> included many sweeteners like support for young jobseekers, senior Australians, farmers, huge commitments to Medicare, private health insurance, disability and cancer care.</p>
<p>In contrast, the Abbott-Hockey <a href="http://www.budget.gov.au/2014-15/">2014 budget</a> included cost-cutting measures like reducing the Family Tax Benefit, increasing petrol excise, introducing a GP co-payment, reducing benefits for young jobseekers, tightening the criteria for disability pension and the Seniors Health Card, and removing Seniors supplement for Commonwealth Seniors Health Card holders. (Many of these initiatives were killed off or stalled in the minority-held Senate).</p>
<p>The 2015 budget, with its centrepiece of a small business package that included a tax cut for businesses under $2 million, saw only a small uptick in consumer sentiment, despite the government by then having backed away from a number of its more contentious proposals. </p>
<p>What is surprising though is the reaction when grouped by political voting intentions. In general, throughout the year, consumers supporting the party in office are more optimistic than consumers whose party is in opposition. But come Budget time, voting intentions appear to be irrelevant.</p>
<p>The figures below give the changes in the consumer sentiment index, in the May survey week, pre-post budget release for the last six years, organised according to voting intentions: Australian Labor Party (ALP); Liberal-National Coalition (LNC); Greens and other parties; refused or don’t know (undecided).</p>
<iframe src="https://datawrapper.dwcdn.net/DckPV/1/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="400"></iframe>
<p>Interestingly ALP voters were less negative about the 2016 budget than Coalition voters with a drop of 2.8% among Labor voters compared to 4.7%, probably indicating a backlash from (potential) Liberal voters concerned about planned changes to superannuation concessions for high income earners.</p>
<p>Only once in the last six years did Coalition supporters react positively to a budget release (rising by 16.4%) and that was in 2013 - an election year - for a Budget handed down by the Labor Treasurer Wayne Swan. Supporters of the Labor Party, the Greens and the rest, all gave it the thumbs down that year. </p>
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<p>The strongest positive reception from Labor supporters was in 2015 for the Budget handed down by the Liberal Treasurer Joe Hockey. The upswing in sentiment by supporters of the Labor Party in 2015 was 14.2%, which is a much stronger response than the 3.5% rise for the 2011 Budget handed down by the Labor Treasurer Wayne Swan.</p>
<p>The 2016 ‘election’ budget was not well-received across all categories of voting intentions. Whether the intention is to vote for the ALP, the Coalition, the Greens, other minor parties, or even a ‘don’t know’, the change in sentiment pre-post Budget was negative. It appears that, when it comes to the Budget, voting intentions are no guide to consumer reactions.</p><img src="https://counter.theconversation.com/content/58637/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>More often than not, Australians find budgets hard to like. But research shows a fascinating response on voting intentions.Guay Lim, Professorial Fellow, The University of MelbourneViet Nguyen, Research Fellow in Applied Macroeconomics, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/404702015-05-06T19:49:58Z2015-05-06T19:49:58ZBudget explainer: What do key economic indicators tell us about the state of the economy?<figure><img src="https://images.theconversation.com/files/79872/original/image-20150430-6230-1ghlbmv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The key indicators of the health of the economy are the unemployment rate, inflation rate and economic growth.</span> <span class="attribution"><span class="source">AAP Image/Julian Smith</span></span></figcaption></figure><p><em>By cutting through the buzz and spin surrounding the federal budget, The Conversation’s budget explainers arm you with the key terms and facts needed to understand the budget and what it means for you.</em></p>
<hr>
<p>Certain policy objectives in macroeconomic policy are almost universally accepted by economists:</p>
<p>1. A stable and strong rate of economic growth;</p>
<p>2. Low unemployment; and</p>
<p>3. Stable and low inflation.</p>
<h2>Perhaps less universally accepted are:</h2>
<p>4. A manageable current account deficit in the balance of payments; and</p>
<p>5. Structural fiscal budget balance and a low (or zero) level of debt.</p>
<p>Number four of these objectives receives little attention in Australia these days. However, the fifth of these objectives appears to have taken over economic and political debate in Australia.</p>
<p>Certain key indicators are used to judge the health of the economy and to evaluate government or Reserve Bank policies in terms of their ability to reach these objectives.</p>
<h2>A stable and strong rate of economic growth</h2>
<p>Economic growth refers to the expansion of society’s productive potential. It is usually measured by the annual percentage change in real gross domestic product (GDP). </p>
<p>Real GDP is a measure of the value of production of all goods and services produced in Australia, after the effects of inflation have been removed. </p>
<p>Therefore, if economic growth is 3% this year, then 3% more goods and services were produced this year than in the previous year. </p>
<p>Real GDP and economic growth are not perfect measures of what’s happening to a society’s wellbeing. Nevertheless, more jobs, increased standards of living and providing for the most disadvantaged depend on having a strong rate of growth.</p>
<h2>Low unemployment</h2>
<p>Unemployment is the greatest contributing factor to poverty. High unemployment also represents a waste of economic resources as less is produced (lower GDP) if workers are not being fully utilised. </p>
<p>There are other costs associated with high unemployment including a loss of individual self esteem, loss of skills, retraining costs and social problems. Governments also face consequences such as having to reallocate scarce taxation revenue from productive projects to social security payments, as well as the electoral unpopularity often associated with high unemployment. </p>
<p>The widely quoted indicator of unemployment is the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/products/FBE517ECA9B07F63CA257D0E001AC7D4?OpenDocument">unemployment rate</a> derived from the Australian Bureau of Statistics (ABS) Labour Force Survey. </p>
<p>The unemployment rate is the percentage of the labour force that is unemployed. The labour force is the sum of the employed and the unemployed. You only have to work for one hour in paid employment per week to be classified as employed! To be classified as unemployed you have to be ready to start work and have actively looked for work in the past four weeks before the survey. </p>
<p>About <a href="http://theconversation.com/unemployed-or-lazy-economists-know-better-30515">1.5 million people</a> of working age rely almost entirely on social security for a living but only a third are unemployed.</p>
<p>While an important aim is to reduce the unemployment rate, being too successful or reducing it too quickly can itself be a problem as this can be interpreted as evidence of a potential increase in inflation. In economics jargon, unemployment must not fall too near the “<a href="http://theconversation.com/not-just-a-number-defining-full-employment-15248">natural rate of unemployment</a>”.</p>
<h2>Stable and low inflation</h2>
<p>The inflation rate is the percentage increase in the general price level in the economy from one year to the next. </p>
<p>The most common measure of the general price level is the consumer price index (CPI). Although its measurement and interpretation is subject to many caveats it is still generally recognised as a good indicator of the cost of living of the average household. </p>
<p>If the index rises from, say, 120 to 122 then the inflation rate is 100*(122-120)/120 = 1.7%. </p>
<p>Wages and social security payments would need to rise by 1.7% in order for standards of living not to fall.</p>
<h2>A structural fiscal budget balance and a low (or zero) level of debt</h2>
<p>If the federal government’s expenditures are greater than its revenue a budget deficit results. Budget deficits add to government debt. </p>
<p>It is generally accepted the actual government budget will (and should) fluctuate between deficit and surplus during, respectively, downswings and upswings in the economy. </p>
<p>Unlike the actual budget balance, the structural balance is basically the budget deficit or surplus after accounting for cyclical movements in the economy – the balance when conditions are normal or average. </p>
<p>Considerable <a href="http://theconversation.com/australias-economy-is-healthy-so-how-can-there-be-a-budget-crisis-26036">political debate and media coverage</a> of deficit and debt issues concerns have centred on the fear that Australia, on its current trajectory, is heading for (or well on the way to) an unsustainable structural deficit.</p>
<h2>Other indicators</h2>
<p>The above areas may be traditional indicators of the health of the economy, yet they say little about the underlying processes which give rise to them. </p>
<p>For instance, economic growth can only increase and unemployment can only be reduced by firms increasing output and jobs and investing in new projects. This is why business confidence is so important. </p>
<p>The National Australia Bank (NAB) publishes a quarterly <a href="http://business.nab.com.au/tag/business-survey/">index</a> of business confidence based on a survey of Australian firms. These firms are asked to rate their expectations of a number of factors, such as employment and business profits. Indexes are calculated by taking the difference between the percentage of respondents nominating good or very good, or a rise and those nominating poor or very poor, or a fall. The business confidence index is an average of these individual indexes.</p>
<p>Businesses are unlikely to expand if they don’t think consumers are going to spend and this is where consumer confidence is important. </p>
<p>The <a href="https://melbourneinstitute.com/miaesr/publications/indicators/csi.html">Westpac-Melbourne Institute Consumer Sentiment index</a> is based on surveys of households regarding their expectation of key economic variables affecting them, such as the family finances. On the basis of whether their conditions are expected to improve or get worse households are classified as optimists or pessimists. If optimists outnumber pessimists then the index exceeds 100 and obviously the higher the index, the higher, on average, is consumer confidence.</p>
<p>Despite a myriad of indicators and attempts to introduce many other measures of wellbeing into the policy debate, such as the <a href="http://lateraleconomics.com.au/wp-content/uploads/2014/02/Fairfax-Lateral-Economics-Index-of-Australias-Wellbeing-Final-Report.pdf">Fairfax-Lateral Economics Index of Australia’s Wellbeing</a>, the unemployment rate, inflation rate and the rate of economic growth will continue to be the key indicators of the health of the economy.</p><img src="https://counter.theconversation.com/content/40470/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Phil Lewis does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article. He also has no relevant affiliations. During his career he has received funding from many private and public sector organisations including most recently the ARC, NCVER, DEEWR and the AFPC</span></em></p>The key economic indicators to look out for on budget night.Phil Lewis, Professor of Economics, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/215102013-12-16T19:15:44Z2013-12-16T19:15:44ZAussie retailers should get their Christmas wish this year<figure><img src="https://images.theconversation.com/files/37816/original/csytpbgf-1387155506.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Christmas consumer ritualism: how will Christmas 2013 pan out for retailers?</span> <span class="attribution"><span class="source">AAP Image/Daniel Munoz</span></span></figcaption></figure><p>Consumer Sentiment <a href="http://melbourneinstitute.com/miaesr/publications/indicators/csi.html">fell</a> by 4.8% in December, but despite the drop other indicators still point toward a robust Christmas period for retailers. </p>
<p>Retail trade <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/8501.0">recorded</a> its strongest result for three consecutive months to October, with Queensland and Western Australia leading the way. </p>
<p>A closer inspection of ABS Retail <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/8501.0">figures</a> indicate six consecutive months of positive results and this suggests consumer confidence has finally returned to the market.</p>
<p>The Commonwealth Bank surveyed 1000 of its customers and <a href="https://www.commbank.com.au/about-us/news/media-releases/2013/festive-spending-to-peak-as-four-million-consumers-plan-to-hit-the-shops-this-weekend.html">estimates</a> we will spend at least A$2.2 billion more this Christmas than we did last year, and the Australian National Retailers Association has predicted we will splurge close to A$30 billion over this Christmas period.</p>
<p>But it may not be a rosy outlook for all retail sectors. Overall we are spending more, but not where we once traditionally did.</p>
<p>Department store sales were down (0.3%) and household goods were flat. In fact Westpac’s Consumer Sentiment report noted a 2.3% decline in shoppers suggesting it was now a good time to buy a major household item. But we are eating out more, with cafes, restaurants and take-away up. Clothing, footwear and accessories also produced a positive result.</p>
<h2>Online shopping hoopla</h2>
<p>The way we shop at Christmas has changed dramatically over the past 20 years. Where once we battled the car parks and crowds, venturing into the large department stores, many of us are choosing more efficient ways to shop this Christmas. </p>
<p>Shopping from the office, in our lounge rooms and on the way to work on tablets and mobile phones is now an easy option. And it would appear three quarters of us are shopping locally online.</p>
<p>But the impact online retailing has had on traditional bricks and mortar retail has to some extent been exaggerated. Australian online retail sales grew to A$14.4 billion to October this year, representing 6.4% of total traditional retail spending. Of that A$14.4 billion, Australian retailers continue to <a href="http://business.nab.com.au/online-retail-sales-index-indepth-special-report-october-2013-5126/">capture</a> the majority of online sales at about 74%.</p>
<p>Online shopping remains at an embryonic stage in Australia at 6.4% of total retail spending. In the United States and the United Kingdom it’s closer to 10% and this suggests significant opportunities for Australian retailers to bolster sales through online platforms. </p>
<p>So are Australian retailers finally catching up, responding to changes in consumer shopping patterns by implementing multi-channel approaches, including online? </p>
<p>Deloitte’s <a href="http://www.deloitte.com/view/en_AU/au/industries/consumerbusinessandtransport/97254c9cc50c1410VgnVCM3000003456f70aRCRD.htm">Christmas Retailers’ Survey</a> suggests Australian retailers continue to lag behind the rest of the world and are not responding fast enough to leverage these opportunities.</p>
<h2>Shoppers are predictable</h2>
<p>For some however, the traditions of Christmas shopping are hard to break. </p>
<p>Christmas shopping is steeped in consumer ritualism. Just as football fans paint their faces, wear their favourite jerseys and engage in the atmosphere of the game, shoppers do the same things. Stocktake sales, Black Friday (US), Boxing Day shopping, and lining up for seafood at Easter are all examples of consumer ritualism. It is a rite of passage. </p>
<p>Christmas shopping is a deeply entrenched, family shopping ritual. Parents bring their kids to the Myer/David Jones windows. We battle the traffic, hunt for a car parking space, push through the crowds, run all over town at Christmas time, because that is what our parents did, that is what we have always done. For this group of shoppers, online shopping at Christmas is just not “kosher”, and telling people how much effort they went through to get the gift simply adds to the sentiment.</p>
<p>NAB’s measure of online retail spending is growing at 0.3% a month, its slowest pace in the three-year history of the <a href="http://business.nab.com.au/online-retail-sales-index-indepth-special-report-october-2013-5126/">index</a>. At the same time, bricks and mortar retail trade grew by 0.5%. This slow down in online sales growth has been attributed in some way to the slump in the Aussie dollar, which has fallen from more than US97¢ to under US90¢. With about a quarter of our online spending going to overseas stores, a fall of that size makes imported goods noticeably more expensive. </p>
<p>A weakening in daily deals sites may also account for this slowdown, as retailers tire of selling their goods and services at deep discounts.</p>
<p>A slowdown in online shopping will be even more pronounced as we lead up to Christmas, and so I predict a strong Christmas for retailers this year.</p>
<hr>
<p><em>This is the first piece in our series on the commercial realities facing Australian retailers this season.</em></p>
<p><em>Read the other pieces below:</em></p>
<p><a href="https://theconversation.com/doing-it-better-overseas-online-retailers-aisles-ahead-21179">Doing it better? Overseas online retailers aisles ahead</a><br>
<a href="https://theconversation.com/ready-steady-shop-shopping-as-sport-19645">Ready, steady, shop: shopping as sport</a></p><img src="https://counter.theconversation.com/content/21510/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gary Mortimer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Consumer Sentiment fell by 4.8% in December, but despite the drop other indicators still point toward a robust Christmas period for retailers. Retail trade recorded its strongest result for three consecutive…Gary Mortimer, Senior Lecturer, QUT Business School, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.