5/2/2012: Irish Consumer Confidence - a bounce in January?

I have noticed that ESRI and KBC Bank are very enthusiastic about the latest reading for their consumer confidence barometer reading for January 2012. Absent the retail sales data for January, we can only speculate as to what the latest increase means. But here's a somewhat scientific method for doing this.

Chart below shows dynamics in Consumer Confidence index and historical and forecast values for two core retail sales indices. The forecasts are based on trend dynamics for each index from January 2008, accounting for the correlation between Consumer Confidence and specific retail sales index and accounting for the latest reading for Consumer Confidence index.

The chart above shows my own Retail Sector Activity Index with the forecast for January 2012 based on the above estimates shown in the first chart.

Here's what is clear from the above exercise. Assuming the Consumer Confidence index reading for January is to be trusted (see below on that), we can expect:

• Index of retail sales value to rise 7.4% qoq and 6.3% mom to the level of 101.8 or 4.1% ahead of where the index reading was 12 months ago. This would put the value index at the levels not seen since July 2009.
• Volume index of retail sales can be expected to rise 5.4% qoq and 3.4% mom. The index reading would reach 104.3 which is 2.6% ahead of where it was 12 months ago and the level not seen since April 2010.
• Of course, Consumer Confidence index now stands at 56.6 up on 49.2 in December 2011.
• My Retail Sector Activity Index, consistent with the current reading in the Consumer Confidence index would be around 110.5 - the level that is 1.6% ahead of where it was 3 months ago, 7.4% ahead of the previous month reading and 6.4% ahead of where the index stood 12 months ago. This reading - were it to materialise - will bring my index to the levels unseen since July 2010.

All of this, of course, is rather academic. The problem with the ESRI Consumer Confidence is that it has only weak relationship with both the Value Index of Retail Sales and the Volume Index of Retail Sales, as the charts below illustrates. Please note: this does not mean in any way that Consumer Confidence Index contains little relevant information, just that it is, in itself, a very weak predictor of the retail sales activity.

I wouldn't be holding my breath waiting for a big Retail Sales bounce in January-February this year.