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Opinion researchers regularly survey all possible target groups about the economic situation. This produces sentiment pictures such as the consumer climate, the business climate or the purchasing manager index. But how reliable is this?
Mood swings often cause the ups and downs on the stock market. One piece of news, one speculation, and the trend can change. A minus turns into a plus – or vice versa.
It is precisely these kinds of sentiments that the world of finance and economics uses to draw conclusions about the future development of the economy. Whether consumers, company bosses or financial analysts – they are all asked month after month about their assessment of the economic situation. These surveys produce indices such as the GfK consumer climate, the ifo business climate or the ZEW economic index.
Economists use this to develop the big picture – not least because there is no other instrument available at such short notice. “We have to remember that the hard data, when published, takes one or two months to be processed,” explains Ulrich Kater, chief economist at Deka Bank. “Whether it is industrial production or even gross domestic product – they all report on a period far in the past. And that is why sentiment indicators are a sensible way of approaching what is currently happening in the economy.” This allows us to broaden our view of economic developments over the next six months.
Reliable consumers
Consumers usually keep a close eye on their finances. The experts at the Society for Consumer Research use their mood to determine the GfK consumer climate for the coming month. Confidence in one’s own income is a key factor in determining future purchases and, as a result, also the revenues of retailers, among others.
Another indicator that is published very early is the ZEW economic index, which reflects the mood on the financial markets. Listening to the stock market, which is particularly susceptible to fluctuations, can make sense, says Felix Hüfner, chief economist at the major Swiss bank UBS: “The idea is that financial analysts observe different indicators than companies,” says Hüfner. “They look at the oil price, they look at the stock market, they look at interest rate developments.” This allows a slightly different lead in economic developments to be depicted – which brings additional benefits.
A look into the companies
Nevertheless, looking at companies is considered to be the most reliable economic indicator. Purchasing managers have a deep insight into their company and its production planning. They monitor and manage the purchase of goods and raw materials and make important investments.
A purchasing manager who is keen to buy is therefore seen as a good omen for the economy – as is a company manager who is in a good mood. Economists consider the ifo business climate, a look into the executive suites of the German economy, to be one of the most reliable economic indicators, although mood swings are also the order of the day here.
“That’s why, for example, the ifo business climate index is only considered to be a meaningful statement if it moves in the same direction three times in a row,” explains Ulrich Kater. “This trend, which then emerges, says something about how the economy will behave in the future.”
And yet the whole thing remains a puzzle until a solid economic forecast can be made from sentiment indicators. “Of course, there are other data that come along the way, such as incoming orders or retail sales,” says Felix Hüfner. “This allows you to check whether the signals coming from the sentiment indices are going in the right direction.” The more “hard” data, the better. But it all starts with the mood, and the mood is what matters.