The Young and the Jaded

By Adam Thurgood on February 23, 2016

Consumer confidence took a turn for the worse today, as the index dropped from 98.1 to 92.2. While any reading above 90 is still considered quite strong, the sharp monthly drop had me curious about the underlying cause(s). Upon further inspection, both the current conditions and expectations portions of the index declined. At the household level, the age group of “Under 35” posted a sharp decrease, falling from 123.7 to 105.9. That made me wonder, do younger consumers have more volatility in their confidence levels?

Using data from 1990 on, I found the exact opposite of my initial hunch. Younger consumers have far less volatility in their confidence levels than older consumers. In addition, confidence levels tend to fall as age increases. Is this a natural phenomenon of becoming jaded with time and experience? Perhaps, but I was surprised that greater experience didn’t result in less volatility.

The Conference Board provides data on three age groups; Under 35, 35- 54, and 55 & Over. I used a traditional scatterplot analysis (the holy grail of investment presentation graphics) to assess confidence and the findings are both encouraging and troubling at the same time. The graph below shows average consumer confidence on the vertical axis and volatility (in confidence points) on the horizontal axis. Like any investment performance scatterplot, the best possible point is the one that is highest and furthest to the left.

As depicted, the “Under 35” age group has the highest average confidence and the least amount of volatility. This is great news because we now have about 77 million Millennials (or about 24% of the population) in this age group. Confident consumers tend to be a strong positive for the economy, so having such a large contingent of the population in this confidence category is promising. Unfortunately, we have over 100 million people that are in the “55 and Over” grouping and they don’t generally feel as chipper about the state of affairs. In addition, their confidence tends to be more volatile, which could have huge economic repercussions, given their relative size of the population.

With current levels of confidence at about the long-term historical average across all three groups and volatility measures in the 20’s, there’s a pretty good chance that confidence will be significantly different from current levels in the not too distant future. So what’s the most likely catalyst for a movement in confidence?

There are a variety of factors that could serve as the catalyst for a significant move up or down in confidence. I continue to believe that the longer gasoline prices stay low, the more likely we will see an improvement in expectations as consumers begin to feel the changes in gasoline are not temporary. The uncertain political landscape also has the potential to move confidence in either direction, depending on the outcome of the Presidential primaries. Stock prices, job growth, and inflation are all potential catalysts as well. Only time will tell which catalyst proves to be most important and which direction confidence ends up moving, but it’s fairly safe to say that with 70% of GDP coming from consumption, investors should be keeping a close eye on the confidence story.