Consumer Sentiment Measurements

Consumer confidence measurements have become a widely accepted tool in gauging the state of economic affairs, helping businesses and governments anticipate consumer spending and economic activity. These measurements were first created in the postwar United States, during a time when private consumer spending became an ever more integral part of the economy, and policy makers were interested in influencing mass demand as a part of Keynesian macroeconomic steering efforts. As American as such consumer confidence measurements may have seemed, however, they had some European roots, and Hungarian-born émigré George Katona was the driving force in developing the first consumer confidence index.

The index emerged out the University of Michigan’s Survey Research Center and built on World War II era efforts to understand consumer attitudes on the home front. Katona studied American consumer behavior during the war and became fascinated with the subject. In 1947, he initiated the Economic Behavior Program at Michigan, which conducted the Survey of Consumer Finances for the Federal Reserve between 1946 and 1971 as well as the still-ongoing Survey of Consumer Attitudes, which is used by the Department of Commerce. These surveys asked representative samples of households about their views and expectations with regard to their own finances and to the state of business and the economy as a whole. Building on their survey data, Katona’s team calculated an index which – like a barometer – aimed to predict consumer behavior in the near future. Published since 1952, the Index of Consumer Sentiment is included in the Department of Commerce’s Composite Index of Leading Indicators. The conceptual basis of the consumer confidence measurements was heavily influenced by Katona’s interest in combining economic and psychological research. This approach stemmed directly from his experiences in crisis-ridden interwar Germany, where he had pursued a dual career in economics and psychology. After the war, he developed these ideas in several influential publications on behavioral economics, drawing heavily on the work of another European émigré to the United States, Kurt Lewin to understand consumer responses to affluence.

Consumer confidence measurements became one important interpretative framework for analyzing differences in consumer behavior in Europe and the United States. Katona and others saw one key to American success in the optimistic attitudes of its consumers. This optimism seemed to be lacking among Europeans, who had not adjusted to the new postwar era of prosperity. By the 1960s, consumer confidence measurements had begun to find their way across the Atlantic and a similar survey based on Katona’s methodology was conducted by the European Commission beginning in 1972.