This month's issue

Subscribe to Colored Stone!
Contact Customer Service

Sign up for the Free Colored Stone Gem Mail Newsletter!

Illustration by Dushan Millac

With the holiday season getting into full swing, it’s not uncommon to find retailers scouring the pages of business journals for the usual run of holiday forecasts related to consumer spending and retail sales.

In recent years, consumer forecasts have garnered even more attention than usual, thanks to volatile economies around the globe, a recessionary vibe in the United States, and far-reaching variables like the war in Iraq or last year’s dock worker strike on the U.S. West Coast.

But as retailers are deluged with holiday season predictions from a long list of consulting groups and consumer trend watchers, two questions beg to be asked: How are these forecasts made in the first place? And how accurate are they, really?

According to Delos Smith, who specializes in U.S. business conditions as senior business analyst for The Conference Board, every forecast has a unique recipe. Some use formal models which are based on economic assumptions. Others are based on hard numbers like household incomes, national employment rates, wage gain percentages, and real housing prices. And some forecasters, such as Smith, include anecdotal evidence alongside consumer confidence measures and other economic data.

“All the numbers that we call ‘hard’ are based on surveys,” explains Smith. “Anecdotal evidence would be the Federal Reserve Bank’s (FRB) beige book, an informal review by the FRB of current economic conditions. I also talk to a lot of people and I read a lot of surveys where the surveyor is asking a lot of questions. But with the ‘hard’ numbers and the anecdotal numbers, there is a lot of judgment and experience that are needed. You need to ‘live’ with the numbers for a while.”

The Conference Board, a not-for-profit organization that specializes in marketplace research, is probably best-known for its Consumer Confidence Index. The index is based on a representative sample of 5,000 U.S. households, where consumers are asked to rate their attitude toward current business conditions, business conditions in six months, current employment conditions, employment conditions in six months, and total family income in six months.

One index that attracts heavy interest from Main Street retailers and Wall Street alike is the Retail Sales Index. The measurement tallies up the sales of all goods based on a sampling of retail stores of different types and sizes. According to investment Web site Investorwords.com, many analysts tend to use the measurement “ex-auto,” meaning without sales figures from the automobile industry, which can skew the index heavily and may not provide an accurate picture of overall purchasing trends.

Then there’s the ABC News/Money magazine Consumer Comfort Index, which is based on Americans’ ratings of the national economy, their personal finances, and the buying climate.

While most high-profile gauges of consumer mood are still based on traditional survey methods, the Internet is being used as an important tool in the gathering of industry numbers. Internet research firm comScore, for example, extrapolates data from a panel of more than 1.5 million members who have agreed to have their Internet behavior confidentially monitored on an anonymous basis.

Meanwhile, the Yahoo!/ACNielsen Internet Confidence Index measures consumers’ attitudes related to e-commerce, as well as more general consumer behavior in the United States. Internet portal giant Yahoo! publishes the index results on a quarterly basis, while partner ACNielsen conducts research for the measure through telephone interviewing of a sample size audience of 1,000 adults.

While each of these indexes use slightly different methods, all are based either on statistics — the numbers that analysts believe most directly affect consumer spending — or on consumers’ gut feelings about what’s happening.

The big question, of course, is how well they work.

According to “The Usefulness of Consumer Confidence Indexes in the United States,” a paper published by the Bank of Canada, consumer confidence measures “could be helpful during periods of major economic or political shocks. Such periods are usually associated with high volatility of consumer confidence, suggesting that large swings in confidence could be useful indicators of consumption.”

In other words, major shifts in consumer mood might have an effect on sales, but day-to-day changes have little impact on the overall economy. That’s one of the major criticisms of confidence surveys.

According to the research paper “Forecasting Australian Consumer Sentiment,” published by forecasting and futures consultancy Foreseechange.com, many of today’s business and consumer sentiment surveys hold little value to the Main Street retailer. “Once we allow for interest rate movements, consumer confidence measures contain no information about the future of consumer spending.” The paper cites a research report from the Reserve Bank of Australia, dated November 2001, arguing that “there is little evidence that the [consumer and business sentiment] surveys tell us anything we didn’t already know.”

The basic flaw in any forecast is that it’s based on current conditions, and any predictions made from it are only accurate as long as those conditions don’t change. Take, for example, the 2002 holiday season. It started out strong in October with above-average spending, and then took a nose dive in November as the U.S. economy was announced to be in recession and war with Iraq looked increasingly certain.

The early forecasts, therefore, tended high. The National Retail Federation predicted that holiday retail sales would increase 4 percent. The Deloitte Research Leading Index of Consumer Spending checked in with a year-over-year increase of 6.32 percent.

Consulting firm Retail Forward gave a number of 3.3 percent growth. The actual figure? An increase of 1.6 percent, as tallied by the National Retail Sales Estimate.

Not all analysts were making bullish predictions, though.

The Bank of Tokyo-Mitsubishi’s 2002 holiday forecast warned: “The retail industry worry level is very high, with consumers facing a weak job market and concern about war with Iraq. Price discounting is widespread . . . Strategy is to promote, advertise more heavily.”

So in the end, how valuable are these forecasts? The Conference Board’s Smith maintains that they play a vital role in the life of the retailer, in spite of their imperfections. “[Retailers] must pay attention to the forecasts because they don’t have any choice but to pay attention,” he says, adding that smart outfits will use forecasts as part of a bigger planning picture. “The best retailers use their own judgment. They know what the forecasters say, but their own experience is what truly counts.”

Because jewelry retailers both online and offline are more susceptible to the fickle ways of consumers, especially come holiday season, some industry watchers argue that they in particular need to be tuned into analysts’ retail predictions.

“Jewelry is a very discretionary type of purchase, and the consumer must feel that they can buy a very discretionary item,” says Smith. “Consumer confidence measures become important to [the jewelry industry] because they try to measure the feeling of the consumer.”

The initial forecasts for the 2003 holiday season began in September. Perhaps shaken by the economic and political turbulence of the past year, analysts were cautiously calling for growth of between 1.5 and 2 percent, to be adjusted as events unfolded.

Within the jewelry industry, retailers were taking a quietly confident approach. “I think the holiday season will be as expected by most retailers,” says Fred Mouawad of online jewelry retailer Mondera.

“Retailers have taken the leap of faith and replenished their inventories, and most are ready for the season. There is definitely the attitude of ‘business is as usual,’ and most players are anticipating improving conditions for 2004.”

While analysts don’t have a crystal ball, for anyone seeking insight into future sales, a gauge of consumer mood is the next best thing. With improving economic news trickling in from the financial centers of New York, London, and Tokyo, that mood is looking up.