Week 29, 2011: Consumer Confidence vs Retail Sales

Summary: Data for both the Nationwide Consumer Confidence Index and retail sales came out this week, and we put them together to see how good an indicator of future sales consumer confidence really is.

What does the chart show? The blue line, measured on the left hand axis, is the Nationwide Consumer Confidence Index. It is an index summarising the economic mood of a sample of UK consumers, particularly focusing on their expectations of what the next 6 months will be like. June 2004 is equal to 100, and everything else is proportional to that. The red line, measured on the right hand axis, is the percentage change in the seasonally adjusted volume of retail sales between one month and the same month from the previous year. It essentially shows whether total retail sales have grown or shrunk over the previous year.

Why is the chart interesting? Measures of consumer confidence are often touted as being a good indicator of future movements in the economy, with the argument that if confidence is low, people are less likely to spend their money on goods and services. We would therefore expect consumer confidence to very roughly predict whether retail sales would go up or down over the next six months.

What the chart above appears to show, however, is that consumer confidence is much more useful as a snapshot of how gloomy people are at that moment, rather than a genuine prediction of the next six months. Where there is a correlation between the two measures, there is no six month time delay. This is good news for the next 6 months, as Nationwide have said their consumer confidence index fell by 4 points from May to June.