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The Happiness Factor

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To get a sense of how freely consumers are likely to be spending in the near future, retailers have traditionally relied on the Consumer Confidence Index, the aggregate score of a monthly survey conducted and reported by the Conference Board. Broadly speaking, the CCI reflects public reaction to headline economic news. It reached an all-time high of 144.70 in May 2000 when the boom of the 1990s was at its peak and reached an all-time low of 25.30 in February 2009, after months of disastrous news on the global economic and banking fronts.

This is one of the things economists and business planners like about the CCI: it’s rational. It shows that people are optimistic when the news is good, pessimistic when it’s bad. When they’re optimistic, the theory goes, they’re more likely to make big-ticket purchases like cars or houses. When they’re pessimistic, they’re less likely.

Some intriguing new findings from Prosper Insights & Analytics, however, suggests that consumers’ willingness to commit to big-ticket items may have less to do with their expectations of the economy than with their overall sense of emotional, physical and social well-being. The happier they are, the more willing they are to invest in the future.

You can’t take it with you
To test this hypothesis, Prosper first set up a monthly survey of consumers’ satisfaction with 10 key aspects of life: relationships with family; relationships with friends; home life; neighborhood; dwelling (apartment, house, condo); love life; health; work life; and government. (Government comes in a distant tenth, at 17.5 percent contentment; relationships with family is the leader at 74.4 percent.)

The collective result of this survey is the Prosper Happiness Score. Tracking began in July 2010, which the firm uses as a baseline of 100.0. The Happiness Index subsequently dipped below that level until January of 2012, when it crossed the baseline. It’s stayed above it ever since, and is currently at 104.2.

To get an idea of possible relationships between happiness and economic activity, Prosper Analysts began tracking correlations between the ups and downs of the Happiness Index and fluctuations in a number of government data points. Statistical analysis revealed a number of surprisingly high correlation coefficients in commercial and industrial loans (.79), housing permits (.79), light-weight vehicle sales (.73) and a number of other economic indicators. (A correlation coefficient of 1.0 would indicate a 100 percent correlation. Anything above .50 is considered significant.)

Happy motoring
Over a three-year period, Prosper tracked the aggregate national happiness score against respondents’ replies to its own monthly consumer survey when asked, “Are you planning on buying/leasing a car or truck within the next six months?”

The accompanying chart gives a month-to-month picture of three indices: the Happiness Score, percentage of respondents planning to buy a vehicle and the monthly consumer confident/very confident total. While there is a fairly high correspondence between purchase plans and consumer confidence, there are also sharp divergences, most notably in April 2010, January 2011 and November 2012.

In all three cases — and, less dramatically, on a month-to-month basis throughout the entire period — the Happiness Score more accurately maps consumer behavior. The lesson here appears to be that many consumer decisions are based on emotion, not economic data. It’s important to know how consumers feel about the economy — but it may be just as important to know how they feel, period.