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The key to recovery.

A key factor--if to success in virtually any endeavor one may choose to undertake is confidence. Success in sports, in business, even in interpersonal relationships largely hinges upon one's confidence in his/her skills and abilities.

The U.S. economy is no different. At the micro level, the economy is driven by the behavior and activity of millions of individual consumers, all of whom make economic decisions based upon the information they possess about their unique position and their perceived prospects for the future. If individual consumers feel generally confident in their employment situation and other future income streams, they will make economic decisions that are beneficial for themselves, and ultimately for the overall economy. When hundreds of thousands or even millions of consumers make such decisions at the same time, the positive impact on the macroeconomy is dramatic. Similarly, low levels of consumer confidence will have a negative economic impact.

In addition to the direct impacts on consumption, consumer confidence levels indirectly impact stock and bond prices, and the value of the dollar. Overall consumption (and hence product ion 1 levels impact corporate profitability. The results are taken into account by the stock market, which rewards successful companies and penalizes struggling companies. In an ironically cyclical manner, i 1 ultimately impacts consumer confidence: Those consumers holding stock that is growing in value feel wealthier, and thus more likely to feel confident in their present (and, perhaps, future) situation.

Thus, the ability to quantify consumer confidence is an important tool businesses and policymakers use to guide their near- and long-term decisions, to take advantage of economic growth resulting from elevated consumer confidence, as well as to mitigate the economically harmful effects of diminished consumer confidence.

Quantifying Confidence

Among the several measures of consumer confidence referenced frequently in the media is the Consumer Confidence Index (CCI), released monthly since 1967 by the Conference Board. The CCI is calculated based on a five-question monthly survey of 5,000 American households. Respondents are asked questions about their views of the present and the future. The answers to the questions are compiled to form the CCI.

The CCI is an index, with a value of 100 being assigned to 1985. That year was chosen because it represents neither a peak nor a trough in the business cycle. Between 1967 and today the CCI has averaged approximately 93. 'Historically the CCI reached an all-time high in January 2000 at 114.7; the low was 25.3 in February 2009. In September 2012, the CCI rose to 70.3, up from 61.3 in August. The September figure is the highest since February 2012.

The University of Michigan Consumer Sentiment Index (MCSI) is another frequently cited measure of consumer confidence. Also calculated monthly, the MCSI results from a five-question telephone survey asked of 500 randomly selected American consumers. Using 1966 as its base of reference, the MCSI has ranged from 51.7 in May 1980 to 112.0 in January 2000. In September 2012 the MCSI stood at 78.3, its highest level in four months.

Other consumer confidence indexes are the Washington-ABC News Comfort Index and the Consumer Confidence Average Index, itself a composite of the CCI the MCSI and the Washington-ABC News Consumer Corn fort Index.

Macro Effects of a Micro Indicator

Consumers play a tremendous role in determining the overall direction of the macroeconomy. When consumers purchase large-ticket items, such as homes, cars, furniture and appliances, the economy grows. Manufacturers find demand for their goods increasing, and they hire additional workers to keep up with demand.

However, before making such purchases, consumers evaluate both their current economic position and their future prospects. They also take into account the political climate at home and world events. If they feel secure in their future prospects--specifically their employment situation tind hence their future income--they will be inclined to make Larger-scale purchases. If not, they will defer or even cancel their plans.

To a certain extent, then, it can be said that consumer confidence is a self-perpetuating spiral. When confidence is high, consumer spending increases, along with the associated beneficial impacts for the economy. The economy improves, causing consumer confidence to further grow. Conversely, declining consumer confidence causes manufacturers to cut back on production, and thus employment contracts and consumer confidence falls further. As a result, changing the direction of the movement of the CCI on a month-to-month basis is not easily accomplished.

Local Impacts

It is not just the markets for so-called "big ticket items" that feel the impacts of shifts in consumer confidence levels. Any discretionary spending is equally impacted--including expenditures for telecommunications services.

"In the past eight years, our service area has lost numerous manufacturing jobs in furniture and textiles," said Mickey Sims, general manager of Buggs Island Telephone Cooperative (Bracey, Va.). "And our local economy is driven largely by the tobacco growing industry," which is currently struggling, Sims said. "We're seeing a great deal of trepidation on the part of consumers and businesses here--some of it's politics, most of it's economics," he added.

The uncertainty has impacted Buggs Island's business. "We're in the process of rolling out wireless broadband in 15 counties using stimulus money," Sims said. "Initially, we had forecast a 30% penetration rate. We've since had to cut that figure in half. Our customers are hanging on to their dollars, and thinking long and hard about buying telecommunications services and what the real economic benefit for their family or business will be. It's a much tougher sell."

Consumers' overall outlook depends greatly upon the success of the major industry in their community. Laura Angell is general manager of Leaco Rural Telephone Cooperative (Hobbs, N.M.), located in southeast New Mexico, near the Texas border. "We live in an oil and gas industry community--in fact, this area has been called 'the EnergyPlex. In addition, in the past decade, a nuclear enrichment facility 7 has located here and employs several hundred residents." Strong energy demand nationally has helped the economy in Leaco's service area to remain generally stable. "Due to the oil and gas business being good, this area has not felt the same economic impact as the rest of the country," Angell noted. "Housing has remained strong, and the unemployment rate is under 3%."

The downside of the area's economic strength has been an influx of competitors looking to serve Leaco's customers. "While our company has been somewhat secluded from the economic downturn, we're finding that competition is strong and consumers are very selective," Angell said. "Consumers expect the same options from us. that the major carriers provide, and they expect it now. Also, the consumer service expectations of the hometown provider--us--are greater than ever before." So far, however, Leaco has risen to the challenge. "We have been able to maintain most of our customer base," Angell noted. "However, growth has been extremely' difficult to obtain."

Even when consumer confidence in the overall macroeconomy is relatively low, consumers will make their consumption decisions from a more micro perspective. "Consumer confidence in our company remains high due to SErA's modern network and community-based customer service representatives and technicians," said Janet Bathurst, general manager of S&A Telephone Co. (Allen, Kan.). However, low levels of consumer confidence can cause even long-term customers to cut back their expenditures. "Unfortunately, the hard economic times have the consumer looking to cut household expenses, and one of the first places they look for savings is on their telephone and Internet bill," Bathurst said.

With no control over consumer sentiment or the performance of the macroeconomy, S&A Telephone can only strive to offer its customers the highest-quality service possible. According to Bathurst, "We know that the entertainment diversity provided by our robust broadband connection is the key factor in customer retention." Even then, however, the company is subject to forces beyond its control. "Our concern is with the recent FCC order(s) and whether we are going to be able to substantiate continued investment in our broadband network."

The Bottom Line

Consumer confidence measures are handy economic indicators that can provide aggregated snapshots of consumers' overall sentiment on a regular basis. In the end, however, each individual consumer looks at her own specific economic: situation and decides how to best allocate her finite resources. Continuing to provide top-quality service--in essence, establishing and maintaining the individual consumer's confidence in the company and the services provided--is the telco provider's best strategy for weathering the ups and downs of consumer confidence.

Rick Schadelbauer is NTCA's economist. He can be reached at
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Author:Schadelbauer, Rick
Publication:Rural Telecommunications
Article Type:Company overview
Date:Nov 1, 2012
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