An Assessment of Consumer Confidence in the Bangor Area and Maine Economies

AN ASSESSMENT OF CONSUMER CONFIDENCE IN THE BANGOR AREA AND MAINE ECONOMIES

by Robert K. Roper, Associate Professor of Business Management; Kim Dowling, Jason C. Glidden, Dawn Neff, and Scott Pullen, Students, Department of Business Management, all at the University College of Bangor, University of Maine System

How do Bangor area residents currently rate the Bangor area and Maine economies? Do they feel these economies will grow, stay the same, or decline in the future? What are their expectations about household income growth? Will they buy a car or VCR soon? These are some of the questions addressed by a survey of Bangor area households conducted in March of 1996. The survey assessed respondents' current and future confidence in the Bangor and Maine economies and solicited information about what they might buy in the near future. This article summarizes the results of the survey, examines whether respondents' characteristics affect ratings, and interprets the results in the context of the Bangor area and Maine economies.

Consumer confidence is important to an economy because it affects household spending. Nationally, household spending on final goods and services (retail sales) represents about 65% of all expenditures for final goods and services, the nation's gross domestic product (GDP). Economists and public officials scrutinize changes in household spending because its decline can precipitate declines in investment spending. Both can cause GDP to decline and spark a recession. Recessions increase unemployment and reduce tax revenue. Both strain a state's ability to subsidize the incomes of the unemployed and provide public services such as education. Because of the strong correlation between consumer confidence and fluctuations in GDP, the Conference Board's Consumer Confidence Index and the University of Michigan's Index of Consumer Sentiment are watched closely. Our survey asked questions similar to the Conference Board's Consumer Confidence Survey.

Presentation of Results

We found respondents to be cautiously optimistic about the current state of the Bangor and Maine economies, and more optimistic about both three years in the future. However, there are some notable differences in the current period. Figure 1 shows the results to the questions, "How would you currently rate the economy of the Bangor area?" and "How would you currently rate Maine's economy?" For Bangor, 17% rated the economy as good, 66% as fair, and 17% as poor. For Maine, 9% rated the economy as good, 59% as fair, and 32% as poor. These figures, we believe, suggest that respondents are cautiously optimistic about both economies as they exist today. They also suggest that respondents are less optimistic about Maine's current economy than Bangor's current economy. Note that 32% of the respondents rated Maine's economy as poor while only 17% rated the Bangor area economy as poor.

We found respondents to be more optimistic about future growth in both economies. Figure 2 shows the results of the questions, "In three years, how do you think the economy of the Bangor area will change?" and "In three years, how do you think the economy of Maine will change?" Respondents rated the prospect for growth similarly for both economies. For Bangor, 35% thought the economy would grow, 56% thought the economy would stay the same, and 9% thought it would decline. For Maine, 37% thought the economy would grow, 50% thought the economy would stay the same, and 13% thought it would decline. We attribute some of this optimism to the respondents' positive outlook on future income growth. Figure 3 in part shows the results to the question, "In three years, how do you expect your household's yearly income to change?" Quite surprisingly, 57% thought their household's income would grow, 33% thought income would stay the same, and only 10% thought income would decline. On the surface, a relationship might apparently exist between expectations for economic growth and expectations for household income growth.

To detect if a relationship exists between expectations for economic growth and expectations for income growth, we divided the respondents into two income groups: respondents who thought their incomes would grow and respondents who thought their incomes would stay the same or decline. Our question was, "Are respondents who expect their household's income to grow more optimistic about growth in the Bangor area economy than respondents who expect their household's incomes to stay the same or decline?" Figure 4 suggests that the answer is yes. Of the respondents who expect income to grow, 51% expect Bangor's economy to grow. Of the respondents who expect income will stay the same or decline, only 16% expect Bangor's economy to grow. We found similar results for Maine. Of the respondents who expect income to grow, 49% expect Maine's economy to grow. Of the respondents who expect income to stay the same or decline, only 21% think Maine's economy will grow. Thus, there seems to be a positive relationship between respondents' expectation for income growth and their expectation for growth in both economies. However, the cause and effect relationship is not clear. It may be the case that believing the economy will grow creates an expectation that one's income will grow. For example, a retail store owner realizing increased sales might deduce that his or her income will grow because of a more active consumer or economy. Or it may be the case that a higher anticipated income may induce the consumer to spend more, which in turn grows the economy and creates a self fulfilling prophecy.

An additional consideration important to consumer confidence is their outlook on job opportunities. Interestingly, respondents are less optimistic about growth in job opportunities than in household income. Figure 3 also shows the results to the question, "In three years, how do you expect job opportunities in your work field to change in the Bangor area?" Both employed and unemployed respondents answered this question. Note that only 18% thought job opportunities would grow, while 52% thought opportunities would stay the same and 21% thought job opportunities would decline. A small minority, 9%, did not know.

Another important objective of the survey was to assess the purchasing intentions for durables such as television sets, washing machines, VCRs, and automobiles. Expenditures for these items generally increase or remain steady when consumers are optimistic about their income security, income growth, and the economy. Expenditures decline when optimism wanes. Besides being important for the private economy, these expenditures are an important source of tax revenue for Maine's state government. Table 1 shows the purchasing intentions of respondents. For selected durable goods other than automobiles, 71% report no intention of buying, 21% intend to purchase one item, and 8% intend to buy two or more items in the next six months. These percentages are consistent with the January 1996 Consumer Confidence Survey (CCS). This survey found that 26.2% of all households planned to buy within six months at least one of the durable items listed in the footnote of Table 1. Regarding automobiles, our survey found that 72% of the respondents report no intention to buy and 28% intend to buy. These figures are higher than those reported in the CCS, but the CCS uses a six-month period and our survey uses a one year-period.

Analysis of Economic Ratings by Respondent Demographic Characteristics

We also wanted to explore any relationships that might exist between the respondents' demographic characteristics and their ratings of the two economies. For example, we wanted to know if respondents with a high school education or less rated Bangor's current economy the same as respondents with more than a high school education (associate, bachelor, or advanced). Table 2 shows this and other comparisons for the current Bangor area economy.

For education, household income, and currently employed, there are slight but insignificant differences in the rating distributions within each variable's sub-groups. Respondents who have a high school education or less rate the current Bangor economy about the same as do respondents with more than a high school education. The same is true for the household income and employment subgroups. The employment result is interesting, because we expected respondents not currently employed to be less optimistic than those currently employed. They are not. One possible explanation is that some of those not employed are unemployed by choice and do not form judgements about the economy based on the availability of wage employment. This might be true of someone who is retired. Thus our conclusion, using the sub-groups we defined, is that level of education, level of household income, and current employment status of Bangor area residents do not affect their rating of the Bangor area's current economy.

Interpretation of Results in the Context of the Bangor Area and Maine Economies

The primary findings of our research are that Bangor area residents are cautiously optimistic about the two economies and more optimistic about both over the next three years. We have also found them to be strongly optimistic about income growth and cautious in their assessment of future job opportunities. These results are not surprising when one looks at retail sales data for Bangor and Maine, and unemployment figures for Penobscot County (in which Bangor and all other surveyed towns are located) and Maine. Between 1991, when Maine and the nation were in a recession, and 1995, taxable retail sales (nominal) in Bangor increased from $620,520,000 to $731,195,000, a 17.8% increase. Taxable retail sales in Maine increased from $8,555,880,000 to $10,414,282,000, a 21.7% increase. During this same period the annual Penobscot unemployment rate fell from 8.0% to 6.1%. Maine's annual unemployment rate fell from 7.5% to 5.7%. Respondents may be interpreting a lower unemployment level as meaning improved job security and with it improved income growth. Inflation has been moderate to nil. In Bangor, specific development projects such as the construction of the Acadia Hospital (1992), the construction of a Sam's Club and a Wal-Mart (1991 and 1993), and the $3 million operations center for Bangor Savings Bank (1993) have all injected investment dollars into the local community and added employment opportunities. These improvements have happened gradually over time. We believe that Bangor area residents, professional and nonprofessional alike, have come to trust the slow-growing but steady nature of these economies. And this is why they responded the way that they did.

FIGURE 1: Current Rating of Bangor Area and Maine Economies

FIGURE 2: Growth Expectations of Bangor Area and Maine Economies in Three Years

FIGURE 3: Growth Expectations in Jobs and Household Income in Three Years

FIGURE 4: Bangor Area Economic Growth Expectations

Bibliography

Christopher D. Carroll, Fuhrer J., Wilcox D., "Does Consumer Sentiment Forecast Household Spending? If So, Why?" American Economic Review 84:5 (December 1994): 1397-1408.

The Conference Board, Consumer Confidence Survey (February 1996).

Civilian Labor Force Estimates, Maine Department of Labor (1990-95).

Maine Taxable Retail Sales, Maine Bureau of Taxation (1991-95).

Greater Bangor Profile, Greater Bangor Chamber of Commerce (1993).

Notes

1 The survey was mailed to a random sample of 240 households living in the Bangor area who had a phone listing in the Bangor NYNEX phone book. Ninety surveys were returned for a response rate of 37.5%. No follow-up surveys were sent, and tests for non-response bias were not performed. The survey's design, coding, and analysis were part of a class project in the Department of Business Management, University College, Bangor.

2 See for example Christopher D. Carroll et al., "Does Consumer Sentiment Forecast Household Spending? If So, Why?" American Economic Review 84:5 (December 1994): 1397-1408.

3 More formally termed the "multiplier" effect, this is at the heart of economic growth theory espoused by the British economist John Maynard Keynes.

4 The survey did not ask why the respondent was not working if he or she answered no to the question "Are you currently employed?". There are many possibilities, such as not working by choice, retired, disabled, or unemployed involuntarily.

Table 1

PURCHASING INTENTIONS BY BANGOR AREA RESIDENTS

Item
Percent
Number of durable items within 6 months a
  • 0 items
    		• 71%
  • 1 item
    		• 21%
  • 2 or more items
    		• 8%
    Total 100%
    Purchase Automobile Within 1 Year b
  • No
    		• 72%
  • Yes
    		• 28%
    Total 100%
    a Items include refrigerator, washing machine, TV set, vacuum cleaner, range, clothes dryer, dish washer, stereo, VCR.
    b New or used.

    Table 2

    CURRENT RATING OF BANGOR AREA ECONOMY BY SELECTED DEMOGRAPHIC CHARACTERISTICS

    Education b
    Household Income c
    Currently Employed d
    Rating
    High School or Less
    Associate Degree or Higher
    Less than $35,000 per year
    $35,000 per year
    Yes
    No
    Good
    15%
    18%
    14%
    21%
    18%
    14%
    Fair
    63%
    70%
    72%
    63%
    64%
    72%
    Poor
    22%
    12%
    14%
    16%
    18%
    14%
    % Total
    100%
    100%
    100%
    100%
    100%
    100%
    Number responding a
    40
    49
    42
    43
    68
    22
    a The number of respondents for a particular variable may not add to 90 because a respondent(s) did not answer the question.
    b,c,d Insignificant at the .05 significance level using the Chi Square test.