|Adjustments||Not Seasonally Adjusted|
Consumer spending is an important element of economic growth. The National Income and Expenditure Accounts (2000) show that in 2000 the value of personal consumption accounted for 49% of Irish GDP. Trends in this component are therefore very important for forecasting and planning. A gap that exists at present in Ireland is a widely used indicator for consumer sentiment. This contrasts with the situation in both Europe and the US. At present the EU Commission publishes a consumer confidence indicator for Europe, and includes details of Ireland as one of the member states. In the U.S., measures of consumer confidence by the University of Michigan and the Conference Board receive much attention, both domestically within the U.S. but also internationally. Such indicators have a broader use than solely as an input to model based forecasts. They provide some barometer of consumer sentiment and thus are an additional piece of information that may be used by those analyzing, or interested in, the health of the economy. The IIB Bank/ESRI index of consumer sentiment aims to fill the existing gap in information on the consumer sector. The new index uses monthly data collected by the ESRI for the its monthly Consumer Survey and will be constructed using a methodology based on international best practice.
As an input to the EU-wide Consumer Survey1 the ESRI carries out a nationally representative survey of a minimum of 1,100 completed questionnaires on a monthly basis. A fresh national sample is used each month. This sample is representative of the totality of persons living in private households in Ireland. Thus, the survey represents the views of all persons aged 18 and over across all regions of the country and includes all different labour force status and educational attainment levels.
The principal objective of the survey is to record details on consumers’ attitudes towards trends in the economy. The survey is carried out on a telephone basis. The sample design is based on a two-staged procedure in which 50 sampling points (areas) are selected at random from the Electoral Register. The phone numbers are then selected at random within each sampling point. When the sample has been completed its structure is checked against population totals in terms of region; gender; level of educational attainment and age of respondent. Where necessary an adjustment is made to the data to ensure that the structure of the completed sample is in line with the population totals.
The response rate from the survey varies somewhat each month. Because the telephone numbers are selected at random from within each sampling point one finds that some of these are not valid numbers; some are business numbers, faxes etc.; some have been disconnected; some simply do not reply and ring out. We find that on an average monthly survey about 50 per cent of numbers selected are valid private household telephone numbers that are answered. Among these contacted respondents the response rate in terms of completed questionnaires is in the order of 60 per cent each month. Approximately 30 per cent refuse to participate and the remaining 10 per cent have some other reason for non-response.
The questionnaire used in the monthly survey contains a series of questions that record respondents’ perceptions on recent and likely future trends in the economy. The areas addressed include the following:
· assessment of changes in the general economy in the previous 12 months as well as expectations about likely future trends in the next 12 months;
· perceptions of recent trends in unemployment;
· views on recent trends and likely future outturns in terms of consumer prices;
· recent trends and likely future trends in the financial situation of the respondent’s household;
· views on whether or not the respondent thinks it is currently a good or bad time to incur expenditure on a number of major household items;
· likely future outturns in terms of the respondent’s ability to save.
3. Constructing the IIB Bank/ESRI Index
In general, the consumer sentiment indices are produced in a similar manner across different countries. These indices are usually derived by combining responses to a number of questions, rather than relying on a single question. A central principle of attitude measurement is that summated or combined scores are significantly more reliable that individual items.
A number of consumer confidence surveys already exist and are well established. The EU Commission Harmonised Consumer Survey was launched in 1972, initially in only five countries and on a quarterly basis. From the beginning of the 1980s this frequency was gradually extended and now monthly results are received for all member countries. The EU Consumer Confidence Indicator is calculated using a group of questions from this survey.
Two separate consumer confidence indicators in the US are widely reported and followed by policy makers and the financial markets. Both aim to measure consumer confidence in the overall economy. The University of Michigan Survey of Consumers is a long established indicator in the US. Originally established in the late 1940s as an annual survey it subsequently became quarterly in 1952 and then monthly in 1978. Each survey contains approximately 50 core questions, each of which tracks a different aspect of consumer attitudes and expectations such as: personal finances, business conditions, and buying conditions. From this survey three separate indices are produced: Index of Consumer Sentiment, Index of Consumer Expectations, and Index of Current Economic Conditions. Of these, the Index of Consumer Expectations is included in the Leading Indicator Composite Index, published by the US Department of Commerce, Bureau of Economic Analysis. For the Conference Board, Consumer Confidence survey data are available bi-monthly from 1967 through mid-1977. Beginning June 1977, data are available monthly. The Conference Board produces three indices: Consumer Confidence Index, a Present Situation Index, and an Expectations Index.
Although some differences exist between how the two indicators in the US are calculated the different indices are calculated from the balance of responses i.e. positive responses less negative responses to a group of questions. A review of alternative methodologies found that questions used in the University of Michigan Survey of Consumers are closely aligned with those contained in the Consumer Survey3. The IIB Bank/ESRI indices are constructed using the methodology of the University of Michigan using similar questions. These are:
Q.1. How do you think the economic situation will develop over the next 12 months? (get better/stay the same/get worse)
Q.2. Do you think the number of people out of work in the country in the next 12 months will (increase/remain the same/decrease)?
Q.3. How does the financial situation of your household compare now with what it was 12 months ago? (got better/stayed the same/got worse)
Q.4. How do you think the financial position of your household will change over the next 12 months? (get better/stay the same/get worse)
Q.5. In view of the general economic situation at the present time, what do you think about people buying large items such as furniture, washing machines, TV sets etc. Do you think that for people in general the present time is (good/neither good nor bad/bad)?
The group of indices compiled from the questions contained in the survey are calculated in a similar manner. The Consumer Sentiment Index (CSI) is calculated by computing the relative scores (the percent giving favorable replies minus the percent giving unfavorable replies (the balance), plus 100) for each of the five index questions. Those who reply "Don't Know", "Remain the same" are excluded from the index calculations. Each relative score is rounded to the nearest whole number. The sum of the five relative scores is then divided by the base period total.
Consumer sentiment index = (Q1+Q2+Q3+Q4+Q5) / Base(Qtr 4, 1995=100)
The Index of Consumer Expectations and the Index of Current Economic Conditions are calculated using the same procedures given above, based on a sub-set of questions. The base value is calculated for the relevant sub-group of questions.
Index of Consumer Expectations = (Q1+Q2+Q4) / Base(Qtr 4, 1995=100)
Index of Current Economic Conditions = Q3+Q5 / Base(Qtr 4, 1995=100)
Data is subject to revision.