Related Links

• Demystifying Inflation
• Surveys of Consumers, University of Michigan

Transcript

Tim Sablik: Hello, I'm Tim Sablik, a senior economics writer at the Richmond Fed. My guest today is Joanne Hsu, the director of the Surveys of Consumers and a research associate professor at the Institute for Social Research at the University of Michigan. Joanne, thanks for joining me.

Joanne Hsu: Absolutely. It's my pleasure.

Sablik: We're recording this episode on November 7 [2022]. Joanne is here at the Richmond Fed today as one of the panelists of our District Dialogues event, "Demystifying Inflation." We'll put a link up in the transcript to a video of that panel discussion for listeners who want to check that out.

I'm so excited to get a chance to talk with you one-on-one and learn more about the work that you do for the University of Michigan's Surveys of Consumers. I'm sure many of our listeners are at least somewhat familiar with these surveys from economic news coverage. Could you provide a quick overview of what you're measuring and how the data is gathered?

Hsu: Absolutely. The Surveys of Consumers is a long-running set of surveys that began in 1946. These surveys were designed to collect information about consumer sentiment, their expectations over the economy, and other factors that influence consumer decision-making. We survey 600 people, approximately, per month over the phone. We've been conducting this survey on a monthly basis since 1978. So, we have a very long time series of information on consumer sentiment and their expectations over inflation, labor markets, unemployment and their own income, and other aspects of the economy from then until now.

Sablik: As you mentioned, these surveys have been going on for a long time and they've become an important economic indicator for business leaders and policymakers across the country. I was curious, how did the University of Michigan end up collecting this data instead of, say, a federal agency?

Hsu: This is a great question. I think what it comes down to is the founding of the survey. The survey was founded in 1946, like I mentioned, by George Katona. He [was] a behavioral economist and a psychologist from the University of Michigan. He was really interested in understanding what were the factors that affected consumer decision-making, so he began this survey. This was one of the hallmark surveys of the Institute for Social Research at the University of Michigan.

Since then, ISR — the Institute for Social Research at the University — has become one of the leading institutes of social science and survey research. It's where all the cutting-edge science for survey methodology takes place, so it's a natural home for the Surveys of Consumers.

Of course, since then, it didn't remain just an academic exercise. It's now a survey that's very closely watched not just by academic scholars, but business leaders, policymakers, anyone who's really interested in the trajectory of the economy.

Sablik: Yeah, and as you mentioned, it's this benchmark that people use to get a pulse on what's going on in the economy. But is there also a self-fulfilling component to these surveys? That is, if consumers expect slower economic growth or higher inflation, can that end up influencing what actually happens?

Hsu: As many of your listeners may know, our measures of consumer sentiment and inflation expectations are leading indicators for the economy. What research has shown with our decades of data collection is that consumers actually do a really good job anticipating changes in GDP, changes in inflation, and changes in unemployment.

Now, consumers aren't professional forecasters. But when they make decisions for the future — when they're planning for how they're going to spend their money next week, next month, next year — they're taking in all the information that they have on hand. They're doing the best they can to make their best guess. What our data show is that when you take all these American consumers, maybe individual consumers are off the mark, but as a whole they really do have a finger on the pulse of the economy.

But your question was about whether or not it's a self-fulfilling prophecy. In a way, it can be. There are some aspects in which, for example, inflation expectations can become self-fulfilling. As an example, if you're a consumer who expects higher inflation next year, you might decide, "I have a few years left in my refrigerator. But it's going to be really expensive next year when it actually breaks, so why don't I replace it now?" If enough consumers do that, then that's going to push up the price of refrigerators today and that could exacerbate inflationary pressures.

Likewise, consumers who believe that inflation is going to be really high might decide, "I need to find another job that gets me higher income or I need to negotiate for a higher wage." They may try to seek a job that pays them higher income. Those firms — if they agree to those higher incomes — may pass on those prices right back to consumers. Now, this isn't something that a consumer can do by themselves. This is the possible equilibrium effect of a lot of consumers acting in similar ways and then firms reacting with their price setting to that behavior. So, it's not necessarily the case this will definitely happen, but it can happen.

Similarly with sentiment, if you expect the economy to be on the verge of a downturn and you want to protect yourself by cutting back your spending now, then that's going to decrease demand in the economy and that will accelerate any economic slowdown.

So, there are potential areas of self-fulfilling mechanisms. I wouldn't call them a prophecy. It's just people making decisions based on what they expect. And yes, those things can reinforce the very phenomenon that they're worried about.

Sablik: That's a great summary. I like that you brought up inflation. Obviously, the Fed pays very close attention to inflation expectations and what consumers are thinking about with price changes.

You mentioned also that, obviously, these are surveys of households and consumers that are not professional forecasters. Over the decade [and] prior to the pandemic, I believe that consumer expectations for inflation tended to come in a little bit higher than what we actually experienced. I was wondering if the accuracy of these forecasts affects their value to business leaders or policymakers.

Hsu: When we think about what the inflation expectations are telling us, there are two things to bear in mind. One is that there is the level — the actual number that people are giving us. But then there's also information that we can glean from month-to-month changes, quarter-to-quarter changes, year-to-year changes. In some ways, just looking at a single point in time at what that level is isn't necessarily that informative.

Before this current period of inflation, inflation was indeed very low. Is it zero, half a percent, 1 percent, 2 percent, 2 1/2 percent? Those numbers aren't necessarily meaningful to a typical consumer who isn't paying attention to the CPI. Plus the CPI and the PCE deflator give different numbers as well. So no, I don't really think it matters much if consumers don't hit the CPI mark or they don't hit the PCE deflator mark.

What I think is more meaningful is are consumer expectations steady? Are they changing over time? Are they going up, are they going down? If they change, is it a sustained change over this period of months? Or, is it just a blip that comes up and comes right back down? To me, it's the trend that is more meaningful than looking at a point in isolation.

Sablik: That's exactly what Fed leaders are talking about when they're thinking about [whether] inflation expectations anchored or unanchored, looking at that trend and where that trend is going.

As you're looking into the next year, are you planning any sort of enhancements to the surveys? Will you be looking for anything in particular in the data?

Hsu: The really fascinating thing about running a monthly survey is that we can add questions and take out questions as circumstances might suggest. For example, we just put out special questions on expectations over the election. Later this month, we're going to be putting out a special report on how consumers responded to inflation. As new things come up in society and in the economy, we're able to very quickly add new questions and tell the world what American consumers are thinking.

Sablik: Yeah, it'll be fascinating to watch.

Joanne, thanks very much for taking the time to talk with me today.

Hsu: Thank you so much.

Sablik: For listeners interested in hearing more from Joanne and the other experts talking about inflation, I definitely encourage you again to check out that link to the District Dialogues event in the show transcript. And if you enjoyed this conversation, please consider leaving us a rating and review.