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Does Consumer Confidence Forecast Consumption Expenditure in New Zealand? - WP 03/22

2  Consumer Confidence Surveys in New Zealand

The first survey of consumer confidence was initiated in the United States by the University of Michigan Survey Research Centre in the late 1940s. The purpose of this survey was to measure changes in consumer attitudes and expectations, to understand why these changes occur, and to evaluate how they relate to consumer decisions to save, borrow, or make discretionary purchases. The five attitudinal questions, from which the consumer confidence index is calculated, is only part of a broader survey, and was originally only inserted in order to loosen up the respondents so that they would be more forthcoming about their income and other personal financial details (Howrey, 2001).

In New Zealand, The One News Colmar Brunton Poll (One News) of consumer confidence and the Westpac McDermott Miller Consumer Confidence Survey (Westpac) are the two most widely followed and reported measures of consumer confidence.

Table 1 – Example of One News Colmar Brunton Poll of consumer confidence
Percentage of responses November 2002 December 2002 February 2003 March 2003 April 2003
Economy in a better or worse state than at present during the next 12 months?
[1] Better 41% 42% 38% 27% 34%
[2] Worse 31% 31% 34% 45% 40%
Consumer Confidence Index
( [1] - [2] ) + 100
110 111 104 82 94

Note: Percentage of “same” responses not reported.

The One News survey (formerly known as the Heylen Poll) dates from 1974, but monthly polling only started from 1976. The survey suffers from occasional missing data, and from 1997 onwards is conducted 11 times a year, with no survey in January. The One News survey is actually a political poll, conducted by computer assisted telephone interviews on a random sample of 1,000 eligible voters. The confidence index is based on one question, asked towards the end of the interview, regarding the respondents’ expectation of the state of the economy during the next 12 months. The One News survey does not actually calculate the confidence index. It just reports the percentage of positive (ie respondents saying “better”), negative (ie respondents saying “worse”), or neutral (ie respondents saying “same”) responses. A confidence index is derived by calculating the difference between the percentage of positive responses and the percentage of negative responses, and adding 100. Neutral responses are ignored. This net balance statistic is the most commonly used method of calculating consumer confidence. It allows a single figure to be presented. A downside is that any information content in the neutral or unchanged responses are not directly captured.[2]

Table 2 – Example of Westpac McDermott Miller Consumer Confidence Survey
Percentage of responses March 2002 June 2002 September 2002 December 2002 March 2003
Better or worse off financially now than a year ago?
[1] Better off 34.3% 34.2% 33.8% 32.2% 28.8%
[2] Worse off 32.6% 27.9% 28.4% 30.8% 32.6%
[3] Difference ( [1] - [2] ) 1.7% 6.3% 5.4% 1.4% -3.8%
Expect to be better or worse off financially this time next year?
[4] Better off 34.0% 33.7% 32.5% 32.2% 29.4%
[5] Worse off 14.3% 14.3% 13.1% 10.7% 16.6%
[6] Difference ( [4] - [5] ) 19.7% 19.4% 19.4% 21.5% 12.8%
Good or bad economic times over the next 12 months in New Zealand?
[7] Better off 44.5% 44.2% 39.9% 42.1% 28.7%
[8] Worse off 21.3% 22.0% 24.2% 20.5% 34.6%
[9] Difference ( [7] - [8] ) 23.2% 22.2% 15.7% 21.6% -5.9%
Good or bad economic times over the next 5 years in New Zealand?
[10] Better off 42.0% 42.1% 42.6% 42.9% 44.2%
[11] Worse off 12.9% 11.8% 14.7% 14.7% 13.5%
[12] Difference ( [10] - [11] ) 29.1% 29.4% 27.9% 28.2% 30.7%
Good or a bad time to buy major household items?
[13] Better off 46.9% 46.7% 46.2% 47.8% 48.0%
[14] Worse off 19.3% 18.8% 16.8% 23.7% 21.1%
[15] Difference ( [13] - [14] ) 27.6% 27.9% 29.4% 24.1% 26.9%
Consumer Confidence Index
( [3] + [6] + [9] + [12] + [15] ) ÷ 5 + 100
120.2 121.0 119.6 119.4 112.1

Note: Percentage of “same” responses not reported.

The Westpac survey has been carried out on a quarterly basis since June 1988, conducted by computer assisted telephone interviews on a random sample of around 1,500 people. Because the survey is based on five internationally standardised questions, similar to the ones used in the University of Michigan survey, the confidence index is directly comparable with the Australian Westpac-Melbourne Institute Index of Consumer Sentiment, the University of Michigan’s Consumer Sentiment Index in the United States, and other European confidence indexes. Of the five questions that make up the confidence index, two ask respondents to assess the present economic conditions, and three ask about the respondents’ future expectations of their individual circumstances and the economy in general. The headline confidence index is calculated by averaging the difference in the percentage of positive and negative responses for each of the five questions, and adding 100. As with the case of the One News index, neutral responses are ignored. In the United States, the University of Michigan also produce subindexes relating to current and expected economic conditions. Bram and Ludvigson (1998) found that responses to questions about either the present or the future have more forecasting power than questions that compare the present with the past. For this paper, a Current Conditions Index and a Future Conditions Index are derived based on the component questions, to test whether they have greater predictive ability compared to the headline index (Overall Index).

Despite the methodological differences[3], there is a high degree of correlation between the two consumer confidence indexes, with the One News index tending to be more volatile. The Westpac index is methodologically the more superior of the two, but the One News index has the benefit of being more timely. However, the timeliness factor of the One News index and the reliance on only one question can become a disadvantage when the survey is conducted immediately after a major event, such as the September 11 terrorist attacks in 2001. The terrorist attacks occurred in the middle of the One News interviewing dates for the September 2001 survey. Respondents’ outlook on the economy was likely heavily influenced by the event, resulting in a decline in the confidence index from 114 in August 2001 to 99 in September 2001. Confidence deteriorated further in October 2001 when the index fell to 90. By the December 2001 survey, the confidence index had recovered to 109. In contrast, the quarterly Westpac index showed a modest decline in consumer confidence in the September 2001 quarter, but that quickly recovered in the December 2001 quarter.

Table 3 – Comparison of the two consumer confidence surveys in New Zealand
Westpac McDermott Miller One News Colmar Brunton
Frequency Quarterly Monthly
Methodology Randomly selected households conducted by computer assisted telephone interviews. Randomly selected eligible voter conducted by computer assisted telephone interviews.
Sample Size 1,500 1,000
Questions
  1. Are you better or worse off financially now than a year ago?
  2. Do you expect to be better or worse off financially this time next year?
  3. Do you expect good or bad economic times over the next 12 months in New Zealand?
  4. Do you expect good or bad economic times over the next 5 years in New Zealand?
  5. Is it a good or a bad time to buy major household items?
  1. Do you think during the next 12 months the economy will be in a better state than at present, or in a worse state?
Index Calculation Average of the percentage of respondents saying “better” minus percentage of respondents saying “worse” for each question, plus 100. Percentage of respondents saying “better” minus percentage of respondents saying “worse”, plus 100.

Notes

  • [2]It is possible to calculate alternative indexes from the survey responses, but this lies outside the scope of this paper.
  • [3]The One News survey is essentially just one of the component questions in the Westpac survey.
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