Households rein in a runaway rise in expectations

Sentiment up a healthy 2.2% in week ended Feb 19, coming on top of a 1.7% rise in the preceding week

The BSE-CMIE-UMich Consumer Sentiment Index rose 2.2 per cent in the week ended February 19. This is a healthy increase, given that it comes on top of a 1.7 per cent increase in the preceding week.

The uptick in the consumer sentiment index in the recent weeks reflects an improvement in households' perception regarding their current economic conditions. In comparison, their assessment of their own future prospects has been less optimistic.

This relatively low enthusiasm regarding their future is in contrast with the trend seen through the second half of 2016. During the second half of 2016, households were very optimistic regarding their future well-being, in spite of a lower assessment of their current well-being. Data of the past two weeks indicate a possible reversal in the assessment of households of their current and future well-being.

The Consumer Sentiment Index has two components -- the Index of Current Economic Conditions (ICC) and the Index of Consumer Expectations (ICE). The former is a summary of two questions -- compared to a year ago, is your household better off, worse off or the same and, do you think that this is a good time (or not a good time) to buy consumer durables? The latter assesses the households views on its one-year and five-year income growth prospects and the perception on the general economic conditions in the country in the next five years.

During the past year or so, the ICC has under-performed the ICE. This means that although households have not been doing very well through most of the year, they had continued to keep their hopes higher on the future.

This difference was accentuated during the second half of 2016.

During the first half of 2016, the ICE was, on average, 0.47 percentage points higher than the ICC. The difference wasn't much, then. The ICC averaged at 92.28 and the ICE averaged at 98.75. In the second half of the year, a divergence set in. The average index for current economic conditions fell (97.9), but the index of expectations soared (100.9). Now, ICE was, on an average, three percentage points higher than the ICC. The divergence had set in well before demonetisation. In September 2016, the ICE was 5 per cent higher than the ICE. This is the highest divergence in any month between expectations and current conditions.

What can we understand from this greater hope in the future in spite of sustained muted performance over most of the year. Is this faith? In a way, yes, because we always believe that tomorrow will be much better than today. And so, it is natural to expect consumer expectations to be better than their perceptions of their own current conditions.

But, this is not always true. Richard Curtin, Director, Surveys of Consumers, University of Michigan, the Oracle of consumer sentiments measurement and interpretation in the US, throws light on a very different situation in USA. His presentation at the Economic Outlook Conference in November 2016 (Consumer Outlook: Goldilocks and the Bears) shows that the ICC and ICE have diverged substantially, with the ICE under-performing compared to the ICC. He analyses the situation as follows: "In today's economy, the weaker Expectations Index is due to a growing consensus that interest rates and inflation will be higher in the year ahead."

In India, the RBI just announced the end of easy money policy and there is a fear of inflation rising. So, does this explain the recent slower growth in consumer expectations compared to current conditions? Given that commercial banks reduced lending rates recently and inflation is still quite low in India to impact consumer sentiments, this is most likely an insufficient explanation for India at the moment.

It is more likely that the divergence between the ICC and ICE, which increased during the second half of 2016, had run ahead of reality and so it is now set to reduce. Rising expectations are being reined. In January 2017, ICC fell by 5.8 per cent. But, the ICE fell by a sharper 8 per cent. In the last two weeks, while the ICC grew by nearly 7 per cent, the ICC grew by only 2.1 per cent. Either ways, the gap between ICC and ICE is reducing. During the week ended February 19, the difference between the two was 0.1 per cent.

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Every Tuesday, Business Standard brings you CMIE’s Consumer Sentiments Index and Unemployment Rate, the only weekly estimates of such data. The sample size is bigger than that surveyed by the National Sample Survey Organisation. To read earlier reports on the weekly numbers, click on the dates:
November 21, November 28, December 4, December 11, December 18, December 25, January 1, January 8, January 15 , January 22, January 29, February 4 , February 12 Methodology

Consumer sentiment indices and unemployment rate are generated from CMIE's Consumer Pyramids survey machinery. The weekly estimates are based on a sample size of about 6,500 households and about 17,000 individuals who are more than 14 years of age. The sample changes every week but repeats after 16 weeks with a scheduled replenishment and enhancement every year. The overall sample size run over a wave of 16 weeks is 158,624 households. The sample design is of multi-stratrification to select primary sampling units and simple random selection of the ultimate sampling units, which are the households.

The Consumer Sentiment index is based on responses to five questions on the lines of the Surveys of Consumers conducted by University of Michigan in the US. The five questions seek a household's views on its well-being compared to a year earlier, its expectation of its well-being a year later, its view regarding the economic conditions in the coming one year, its view regarding the general trend of the economy over the next five years, and finally its view whether this is a good time to buy consumer durables.

The unemployment rate is computed on a current daily basis. A person is considered unemployed if she states that she is unemployed, is willing to work and is actively looking for a job. Labour force is the sum of all unemployed and employed persons above the age of 14 years. The unemployment rate is the ratio of the unemployed to the total labour force.

All estimations are made using Thomas Lumley's R package, survey. For full details on methodology, please visit CMIE India Unemployment data and CMIE India Consumer Sentiment.

The creation of these indices and their public dissemination is supported by BSE. University of Michigan is a partner in the creation of the consumer sentiment indices.