ANALYZING CONSUMER CONFIDENCE AND ITS IMPACTS ON THE RETAIL AND

AUTOMOTIVE INDUSTRIES

Lucy Luo, Gerard Rambaud

Econ 1116: Principles of Microeconomics – Section 6

April 17, 2014

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Background

The American economy has been in a state of recovery after the Subprime Mortgage

Crisis, which occurred back in 2008. This crisis led to a subsequent recession. The markets were

affected by the recession; the S&P 500 dropped 45% from its high in 2007 while the net worth of

many Americans decreased.1 Market losses and declines in housing value placed a downward

pressure on consumer spending and confidence. Over the next few years, the Obama

administration signed the American Recovery and Reinvestment Act in 2009, a stimulus packet

that would hopefully stabilize the economy. Other acts such as the Dodd-Frank Wall Street

Reform and protection Act, 2010, were also implemented to prevent such crises from occurring

in the future. Although the economy is slowly getting on its feet again, there seems to be a slump

in consumer confidence in the beginning of 2014.

The Consumer Confidence Index (CCI) is an indicator issued by The Conference Board

that measures “how pessimistic or optimistic consumers are with respect to the economy in the

near future. 2” In order to calculate the CCI, The Conference Board surveys 5,000 households,

questioning residents about opinions regarding current and prospective economic conditions.

Collected data falls under these three categories:

Index of Consumer Sentiment: how consumers feel currently;

Current Economic Conditions: how consumers feel about the economy in general;

Index of Consumer Expectation: consumer’s prospects of the economy in the next six

months.

The index has the ability to gauge the financial health and spending power of the average

consumer. Historically, the index has been a good way to predict consumer spending, which

directly impacts Gross Domestic Product.

At the end of 2013, the Fed’s Survey of Consumer Expectation depicted that consumers

were “less upbeat on a number of topics in December than in November.3” According to the data

collected 45.8% of the respondents indicated that they thought they could find another job if they

1 Altman, Roger. “The Great Crash, 2008,” Foreign Affairs, January 1, 2009. http://www.foreignaffairs.com/articles/63714/roger-c-altman/the-great-crash-2008.2 Barnes, Ryan. “Economic Indicators: Consumer Confidence Index (CCI),” Investopedia. http://www.investopedia.com/university/releases/consumerconfidence.asp.3 “New Consumer Survey Finds Mixed Results,” Moody’s Analytics, January 13, 2014. https://www.economy.com/dismal/pro/blog.asp?cid=245284.

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got laid off. 4 This was a 1.4% drop from the November statistics of 47.2%; moreover, earning

growth fell to 1.81% from 1.85% in November and 2% in June. 5 Consumer spirits had worsened

in the first few weeks of January due to the poor December job reports.

By definition, the retail industry is a sector in the economy that sells finished products to

consumers. An estimated two-thirds of the U.S. GDP comes from retail consumption.6 The

automotive industry is associated with the production, wholesaling, retailing, and maintenance of

motor vehicles. 7 The analysis will delve deeper into the impact of consumer confidence on the

retail and auto industry in terms of equilibrium demand and price from late 2013 to early 2014.

Wage and unemployment analysis will also be analyzed in the two respective industries.

Retail Industry

Although a large portion of the 74,000 jobs created in December was in retail, retailers

are nevertheless hurting, primarily due to the incredibly harsh winter. Wal-Mart, the leader in the

retail industry, indicated that sales were weaker from November to January due to two main

reasons: the reduction of food stamp benefits by the government and the closing of many stores

because of the winter storm. 8 The company planned to lay off 2,300 workers at its Sam’s Club

stores, which accounts for roughly 2% of the workforce of the wholesale chain. 9 Other top

retailers such as Kohl’s, Macy’s, and Target were all expecting lower traffic and low levels of

clearance merchandise; Macy’ announced it would lay off 2,500 employees while Target

planned to cut 475 jobs. 10

Layoffs and jobs cuts directly affect the labor market and consumer confidence, as the

Consumer Confidence Index measures workers’ outlooks on unemployment and the job market.

The U.S. Bureau of Labor Statistics reported that 273,000 people did not work in December due

to weather conditions. As a result, the average workweek dipped by 0.1 hours to 34.4 in

December. The figure below illustrates the labor market specifically in regards to the retail

industry.

4 Ibid.5 Ibid.6 Farfan, Barbara. “2014 US Retail Industry Overview,” About.com. http://retailindustry.about.com/od/statisticsresearch/p/retailindustry.htm.7 “Automotive Industry: Employment, Earnings, and Hours,” Bureau of Labor Statistics. http://www.bls.gov/iag/tgs/iagauto.htm.8 Kurtz, Annalyn. “A cold start for the U.S. economy,” CNN Money, February 7, 2014. http://money.cnn.com/2014/02/07/news/economy/economy-outlook-weather.9 Ibid.10 Ibid.

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The supply curve of labor illustrates the correlation between the amount of labor supplied

by individuals at a given real wage while the demand curve depicts the amount of labor

demanded by firms at a given real wage. When weather conditions cause lower store traffic (and

thus cause less goods to be bought and less income to flow into the stores), retailers such as

Macy’s, Target, Kohl’s, and Wal-Mart lay off workers and/or hire less workers, and the demand

curve decreases (shifts to the right from D1 to D2), which is illustrated in the figure above. This

causes the equilibrium quantity of labor (measured in hours worked) to fall from L1 to L2 and

real wages to decrease from W1 to W2. Workers who have their jobs cut are less inclined to

spend since employment outlooks are ambiguous. The type of unemployment that results in the

labor market is known as cyclical unemployment: “unemployment associated with business

cycles occurring in the economy.11”

Job cuts in the retail industry, and in fact in the labor market as a whole, have negative

repercussions on the demand for retail goods. Examining the specific markets within the broad

scope of retail goods will offer insight on how low consumer confidence affects equilibrium

quantity and price. A majority of retailers such as Wal-Mart offer clothing as part of their

product mix. The elasticity of the demand curve for the clothing market is -0.90 in the short run

and -2.90 — evidently the demand curve becomes more elastic over time as people have time to

11 Beggs, Jodi. “Types of Unemployment,” About.com. http://economics.about.com/od/unemployment-category/a/Types-Of-Unemployment.htm

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find substitutes. To narrow the clothing market down, we can specifically analyze the market for

two clothing merchandise: generic jeans and neckties.

The figure on the left below depicts the market for jeans. Jeans have a relatively elastic

demand curve since there are many close substitutes, for instance individuals can opt out of jeans

and wear khakis, sweatpants, or even shorts. Hence an increase in price will drastically decrease

the number of jeans that a consumer purchases. When unemployment rises due to layoffs,

consumers are less likely to be purchasing jeans, shifting the demand curve to the left (D1 to

D2). As seen, equilibrium quantity falls from Q1 to Q2 and equilibrium price falls from P1 to P2.

On the other hand, neckties have a fairly inelastic demand curve since there are few substitutes.

Poor consumer confidence also decreases the demand in neckties, shifting the demand curve to

the left from D1 to D2 in the figure on the right. The market adjusts to equilibrium at a price of

P2 and an equilibrium quantity of Q2. In both cases, equilibrium quantity and price falls. As we

can see from the two graphs, though elasticity in demand may affect how quantity might change

in response to a simple price change, a same-sized shift for both inelastic and elastic demand

curves (given a similar supply curve for both goods) should result in similarly-sized changes in

both price and quantity demanded.

Automotive Industry

Having described what happened to quantity and price for fashion goods sold in retail

stores as a result of the cold weather, we can also do the same for another critical industry: the

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automotive industry. We will also determine how the automotive industry is faring given the

rising temperatures.

Understanding how automotive sales are affected by various changes is rather important

for various reasons: vehicle sales are usually considered a decent gauge of consumer sentiment

and an indicator of the end of business cycles12. That is, an increase in consumer spending on

high-valued items such as cars may indicate an upturn in both consumer confidence and in the

economy. To narrow the scope of this analysis, we will focus on one firm in particular—General

Motors—during the period of November 2013 to March 2014.

Nov. 2013 Dec. 2013 Jan. 2014 Feb. 2014 Mar. 20140

50000

100000

150000

200000

250000

300000

212,060230,157

171,486

222,104

256,047

General Motors CompanySales for Nov. 2013 - Mar. 2014

TotalVehicle

Sales

Data taken from GM publications found on website (“GM U.S. Deliveries”)

General Motors reported an increase in monthly sales for December, but there was a

sharp decline in sales for January, as seen in the graph above. This coincided with the extremely

harsh winter that bit into the sales for all industries, including retail and the automobile industry.

With the increase in sales in February and March, we can confirm that the polar vortex and the

extreme cold were the main factors holding back car sales. Hopefully, the upward trend will

continue and the economy will mirror this increase in sales.

As discussed earlier, we can blame the sharp reduction in amount of cars sold in January

on the labor market as a whole; with less people working and a shorter workweek (caused by the 12 Soni, Phalguni. “Auto sales: Can record incentives revive auto industry fortunes?,” Market Realist, April 1, 2014. http://marketrealist.com/2014/04/auto-sales-can-record-incentives-revive-auto-industry-fortunes.

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horrible weather), there will be less disposable income that people could spend on cars, resulting

in a decline in demand. Additionally, people who were laid off in the winter will have no flow of

income in the near future, and thus will probably not buy a car. With the results from the Fed’s

survey in December 2013 (the 1.4% drop in people who believed they could find another job if

they were laid off and the dampened consumer spirits due to the poor December job reports13)

coupled with the U.S. Bureau of Labor Statistics report of less people working due to weather

conditions and the layoffs by many companies, and the fact that the cold weather kept people at

home instead of looking for cars at a dealership, one can see why January sales were so low. We

can see the effects of this decline in demand below.

Both quantity and price fell (from Q1 to Q2 and P1 to P2).

Luckily, the sales rose out of this slump. We can observe the vast jump in sales from

February to March 2014, and if we compare March 2014 sales to March 2013 sales, we find a

4% increase14. This growth in sales is also shown in the other firms in America’s “Big Three” in

auto; Ford Motor showed a 3.3% gain, and Chrysler had an impressive 135 gain over last year15.

With warmer weather, people would be more willing to go outside and look for cars, and thus

demand will increase (see figure below). The effects on price and quantity shown in the graph

13 “New Consumer Survey Finds Mixed Results.”14 Isidore, Chris. “GM Sales Unscathed By Recall Crisis,” CNN Money, April 1, 2014. http://money.cnn.com/2014/04/01/news/companies/car-sales/index.html.15 Woodyard, Chris. “March Auto Sales Thaw, Even For GM, Despite Recalls,” USA Today, April 2, 2014. http://www.usatoday.com/story/money/cars/2014/04/01/auto-sales-march/7139357/.

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below is reflected by the actual sales data—the average price paid for new vehicles is up 1.4%

from a year ago in addition to the growth in sales (equilibrium quantity and price both increase).

What is quite interesting about the increase in sales for March, however, is that GM

underwent a recall scandal in February and the beginning of March, yet sales were not hurt at all.

Because of 12 deaths and 34 accidents linked to a defect in an ignition switch—a problem which

was known for nearly a decade, but was just recently addressed by the company16– one would

have expected consumer confidence in GM to fall, bringing down sales numbers.

However, sales figures actually showed an increase in automotive sales for March,

indicating that consumers may have been able to look past the scandal for the most part or that

the effect of the scandal was masked by something that caused a greater shift in demand for

automobiles from GM. However, we still do not know how badly the scandal will affect sales in

the future, as March might have been too soon to notice the effects of the recall on demand.

Currently, the prognosis for April sales looks weak; General Motor’s sales fell 6.3 percent in the

16 Klayman, Ben. “GM Recalls 1.5 Million More Vehicles; CEO Says ‘Terrible Things Happened’,” Reuters, March 17, 2014. http://www.reuters.com/article/2014/03/17/us-gm-recall-idUSBREA2G15220140317

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first five days of April compared with last year (while the sales in the overall market dropped

just 0.3 percent)17.

This makes a lot of sense if we determine what a negative consumer sentiment could do

to demand for a good from a certain firm. According to a survey conducted by the Huffington

Post, about 80% of Americans heard about the scandal and that the company’s reputation has

suffered as a result. Additionally, 42% of those polled had said they were less likely to buy a GM

car, even before any questions about the recall were asked18. Assuming that all else stays the

same, and that demand declines because of consumer mistrust of the safety of GM automobiles,

we can see in the figure below the effect it would have on equilibrium price and quantity: both

price and quantity sold/demanded will decrease, which results in a decline in revenue for a

certain firm (and, as we have seen in the retail example, would result in cuts being made in labor,

which would lead to decreased aggregate demand due to the newly unemployed).

Although the beginning of the year looked quite promising for the automobile industry,

especially after the poor sales because of the horrible winter, GM looks as though it will be

17 Krisher, Tom. “GM Sales Eyed for Impact of Ignition Switch Recall,” The Boston Globe. April 15, 2014. http://www.bostonglobe.com/business/2014/04/15/sales-eyed-for-impact-ignition-switch-recall/xglq0utwmDUBhFfYvirRHL/story.html18 Swanson, Emily. “Americans Think GM Engineered Devastating Cover-Up,” The Huffington Post, April 9, 2014. http://www.huffingtonpost.com/2014/04/09/general-motors-poll_n_5112484.html

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seriously hurt by the faulty ignition switch scandal. Consumer sentiment can be quite a powerful

determiner for how much revenue a firm can make. However, we cannot clearly see how this

will affect the upward trend in sales for automobiles in the market. The growing number of sales

in March—this “spring thaw”—could imply steady growth for the auto industry if the scandal

does not affect consumer sentiment too negatively. With the growth shown in the auto industry,

the U.S. economy as a whole could be getting back on its feet again, even after the slump caused

by the cold winter in early 2014.

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Bibliography

Altman, Roger. “The Great Crash, 2008.” Foreign Affairs. January 1, 2009. http://www.foreignaffairs.com/articles/63714/roger-c-altman/the-great-crash-2008.

“Automotive Industry: Employment, Earnings, and Hours.” Bureau of Labor Statistics. http://www.bls.gov/iag/tgs/iagauto.htm.

Barnes, Ryan. “Economic Indicators: Consumer Confidence Index (CCI).” Investopedia. http://www.investopedia.com/university/releases/consumerconfidence.asp.

Beggs, Jodi. “Types of Unemployment.” About.com. http://economics.about.com/od/unemployment-category/a/Types-Of-Unemployment.htm

Farfan, Barbara. “2014 US Retail Industry Overview.” About.com. http://retailindustry.about.com/od/statisticsresearch/p/retailindustry.htm.

Isidore, Chris. “GM Sales Unscathed By Recall Crisis.” CNN Money. April 1, 2014. http://money.cnn.com/2014/04/01/news/companies/car-sales/index.html.

Klayman, Ben. “GM Recalls 1.5 Million More Vehicles; CEO Says ‘Terrible Things Happened.’” Reuters. March 17, 2014. http://www.reuters.com/article/2014/03/17/us-gm-recall-idUSBREA2G15220140317.

Krisher, Tom. “GM Sales Eyed for Impact of Ignition Switch Recall.” The Boston Globe. April 15, 2014. http://www.bostonglobe.com/business/2014/04/15/sales-eyed-for-impact-ignition-switch-recall/xglq0utwmDUBhFfYvirRHL/story.html

Kurtz, Annalyn. “A cold start for the U.S. economy.” CNN Money. February 7, 2014. http://money.cnn.com/2014/02/07/news/economy/economy-outlook-weather.

“New Consumer Survey Finds Mixed Results.” Moody’s Analytics. January 13, 2014. https://www.economy.com/dismal/pro/blog.asp?cid=245284.

Soni, Phalguni. “Auto sales: Can record incentives revive auto industry fortunes?” Market Realist. April 1, 2014. http://marketrealist.com/2014/04/auto-sales-can-record-incentives-revive-auto-industry-fortunes.

Swanson, Emily. “Americans Think GM Engineered Devastating Cover-Up.” The Huffington Post. April 9, 2014. http://www.huffingtonpost.com/2014/04/09/general-motors-poll_n_5112484.html.

Woodyard, Chris. “March Auto Sales Thaw, Even For GM, Despite Recalls.” USA Today. April 2, 2014. http://www.usatoday.com/story/money/cars/2014/04/01/auto-sales-march/7139357/.