Business confidence

Business confidence surveys are in the news recently.  I thought it might be useful to look at why anyone even does them.

Obviously, there’s no great social interest in making businesses happy and confident. Businesses are people only as a legal fiction. And even the business-related confidence of business owners and executives isn’t an obvious target — if it impacts something that matters, such as GDP or employment, we’ll see it there, and if it doesn’t, well then.

What makes countries around the world measure business confidence is that it’s thought to be a leading indicator.  That’s a slightly unfortunate phrase; we don’t mean it in the “very good indicator, we have the best indicators” sense. “Leading indicator” is less metaphorical than that: it means something that goes up and down earlier than the real economy does, and so helps with economic forecasting.

It’s plausible that business confidence could be useful this way.  Your boss knows if you’re going to be laid off before you do. A business owner has more idea than anyone else whether she’ll respond to a drop in sales by cutting production or expanding marketing.  If we could extract this information from a representative sample of businesses, it should help predict the economic future. Business confidence figures also have the advantage of timeliness: it takes a lot longer to get unemployment or GDP data collected and published.

On the other hand, business owners and managers have opinions as well as knowledge. Part of ‘business confidence’ will reflect the general political reckons of business owners and managers, both their overall feeling about the party in power and their views on bike lanes or the Americas Cup. That part of business opinion isn’t likely to help with forecasting.

Whether a business confidence survey will be economically useful is an empirical question, to be answered by data. It’s likely to help if the survey has questions designed to measure plans and intentions rather than feelings, and it’s likely to help if there’s a well-defined business population and a representative sample of it. The United Nations Statistics Division has written a book on how and why to conduct business confidence surveys and other ‘economic tendency surveys’, with chapters on questionnaire design, sampling frame, weighting, and other nerdy issues. If you feel like running one, you should maybe read it.