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2 consumer expectations

3 University of Michigan Institute for Social Research Executive Committee Gardner Ackley, Chairman, Department of Economic! Arthur L. Brandon, Director of University Relations Amos Hawley, Chairman, Department of Sociology Daniel Katz, Professor, Department of Psychology John W. Led eric, Director, Institute of Public Administration Charles E. Odegaard, Dean, College of LSAA. Willard C Olson, Dean, School of Education Dudley M. Phelps, Professor, School of Business Administration Ralph A. Sawyer, Dean, orace H. Rack ham School of Graduate Studies Henry F. Vaughan, Dean, School of Public Health Senior Staff Angu» Campbell, Director, Survey Research Center Dorwin Cartwright, Director, Research Center for Group Dynamic! Morris Axelrod.Assistant Head, Feld Staff, SRC Charles F. Conn ell, Head, Feld Staff, SRC Tames K. Dent, Study Director, SRC Peter de Janosi, Study Director, SRC Elizabeth M. Douvan, Study Director, SRC John R. P. French, Jr., Program Director, RCGD Raymond R. Garlough, Business Manager Frank Harary, Research Associate, RCGD Irene Hess, Study Director, SRC Jay M. Jackson, Assistant Program Director, RCGD Robert L. Kahn, Director, Human Relations Program, SRC David Rallen, Research Associate, RCGD George Katoru, Director, Economic Behavior Program, SRC Leslie Kiih, Head, Sampling Section, SRC Mordechai Rreinin, Study Director, SRC John B. Lansing, Assistant Program Director, SRC Seymour Lieberman, Study Director, SRC Ronald Lippitt, Program Director, RCGD Floyd C. Mann, Assistant Program Director, SRC E. Scott Maynw, Study Director, SRC Herbert D. Mohrlng, Study Director, SRC James N. Morgan, Assistant Program Director, SRC Eva L. Mueller, Study Director, SRC Donald C Pelz, Study Director, SRC Sidney Rosen, Research Associate, RCGD Ian C. Ross, Research Associate, RCGD Stanley Seashore, Assistant to the Director, ISR Lawrence Schlesinger, Research Associate, RCGD Ezra Statland, Research Associate, RCGD Arnold Tannenbaum, Study Director, SRC Edwin Thomas, Research Associate, RCGD Robert Weiss, Study Director, SRC Stephen B. Withey, Assistant Program Director, SRC Robert Zajonc, Research Associate, RCGD Alvin Zander, Program Director, RCGD

4 consumer expectations by George Katona and Eva Mueller Survey Research Center Institute for Social Rerearch University of Michigan

5 The Institute for Social Research of the University of Michigan is engaged in basic and applied research in the social sciences. The Institute has two main research units. The Survey Research Center is concerned with the application of sample survey methods to the study of economic behavior, human relations in organizations, and public attiudes and behavior in relation to public issues. The Research Center for Group Dynamics studies the behavior of people in groups. The research is conducted in industry, education, government and community life as well as In the laboratory, in an effort to discover the determinants of behavior, of group effectiveness and' of human satisfactions. Inquiries regarding the Institute and its research program may be addressed to the Director of the Institute. Copyright by the University of Michigan

6 Acknowledgments THE collection and analysis of data through sample interview surveys is the cooperative undertaking of a group of people. Since it is impossible to recognize the contributions of every one who has participated in the surveys, the authors wish to acknowledge their great debt for stimulation in theoretical as well aa technical matters to their colleagues at the Survey Research Center. Particularly, Rensis Likert, Director of the Institute for Social Research, and Angus Campbell, Director of the Survey Research Center, had a great share in making the surveys possible. Charles F. Cannell and Morris Axelrod, Head and Assistant Head of the Field Section, and Leslie Kish, Head of the Sampling Section, directed the interviewing and sampling operations which constitute important parts of the surveys. John B. Lansing and James N. Mon gan, Assistant Directors of the Economic Behavior Program of the Center, have worked with the authors on many phases of these studies. Finally, we wish to express our appreciation to Peter de Janosi, Vivian Kleinman, E. Scott Maynes and Stanley Steinkamp, who participated in the analysis of the data. Special thanks are due to Evelyn Stewart for editorial assistance.

7 Contents PAGE Chapter 1 Measuring the Consumer Outlook 1 Purpose of this Publication J The Economic Behavior Program of the Survey Research Center. 3 The Predictive Value of Data on Consumer Attitudes 6 The Plan of this Monograph 11 Chapter 2 Recovery and Prosperity in Nonsurvey Data IS Survey Data on People's Attitudes toward then- Financial Situation 15 Survey Data on People's Perceptions of the National Economic Outlook 22 Survey Data on Opinions of Market Conditions 32 Price Expectations 35 Attitudes toward Installment Debt 39 Summary "40 Chapter 3 The Recession in The Setting 43 Decreasing Optimism 45 Favorable Attitudes in the Fall of Summary 50 Chapter 4 Automobile Demand 53 Measurement of Buying Intentions 53 Comparison of Buying Intentions with Gar Registrations 55 Supplementary Data 61 Determinants of Buying Intentions 67 Appendix Intentions to Purchase Large Household Goods 72 Chapter 5 Housing Needs and Housing Demand 76 The Problem 76 Reasons for Past House Purchases 79 Housing Needs and Desires 83 Chapter 6 An Experimental Index of Changes in Consumer Attitudes 91 Need for Constructing an Index 91 The Problem of Index Construction 93 Clusters and Weights of Components 96 What the Index Shows 99

8 PAGE Chapter 7 The Consumer Sector and the Business Cycle 106 Appendix A Differences in Attitudes among Income, Occupation, and Age Groups 112 Appendix B Methods of the Periodic Surveys 129 The Sample 129 Sampling Errors 153 Interviewing Methods 138 Appendix C Bibliography HI

9 consumer expectations,

10 1 Measuring the Consumer Outlook Purpose of this Publication AT regular intervals the Survey Research Center conducts interview surveys through which changes in the economic attitudes and expectations of the American people are determined. Immediately following each survey a brief release of major findings is made. Analysts of business cycle developments in government, business and universities have made use of this information. Therefore, previous releases of summaries are supplemented here by the publication of the entire material collected on recent changes in consumer opinions and sentiment. This monograph aims to extend and enhance understanding of surveys concerned with psychological factors influencing consumer behavior. The material presented here should contribute to the clarification of the role of attitudes and expectations in the business cycle. Through this publication students of economic trends should be able to form a better judgment of the merits as well as limitations of this relatively new approach to economic research. Following a few earlier studies, two periodic attitudinal surveys were conducted in 1951 and two in These first four surveys, made during the Korean war, were analyzed and reported in a previous publication. 1 It was found there that fluctuations in consumer spending during the Korean war period could be explained in large part by changes in consumer attitudes and expectations. Is this finding applicable only to "abnormal times" in which dramatic military developments and strong inflationary pressures occur? Additional studies were needed to answer this question. The present study is such an investigation of attitudes i George Katona &nd Eva Mueller, Consumer Attitudes and Demand, ibsff-ji, Survey Research Center, lflos. See Bibliography (Appenaiz C) No. 7. References to other publications will be made henceforth by their Dumber la the Bibliography.

11 in times of peace. It is based on five surveys, one conducted in the fall of 1953 and two each in 1954 and Since the Korean war ended prior to the 1953 survey, it appears justified to regard economic developments in 1954 and 1955 as part of a "peacetime cycle". The periodic surveys on the attitudes and expectations of the American consumers serve three major objectives: 1. To obtain measures of changes over time in consumer opinions, attitudes, expectations and plans. 2. To clarify the role and function of the psychological factors influencing behavior under different economic and political conditions. (The notion that attitudes are predispositions to action and therefore may serve as advance indications of action requires elaboration and confirmation.) 3. To advance survey methods by experimenting with new approaches for the measurement of consumer sentiment In the main, this publication will present findings obtained in pursuing the first objective. It contains data about when, how, and to what extent consumer sentiment has changed in the period Description of past developments and trends will constitute a major part of this study. But description cannot be separated from analysis and evaluation. Like any other research, description is based on hypotheses which govern the selection of variables studied, the emphasis placed on them, and the use made of the findings. The validity of survey data measuring attitudes, expectations and intentions must be tested by relating them to subsequent consumer decisions and actions. These tests may be made at the aggregative as well as at the individual level. Both kinds of tests are needed and are useful. Aggregative tests start with the construction of time series from the expressed attitudes of representative samples of the American population. These attitudinal time series may then be checked against (lagged) time series for aggregate consumer purchases (or purchases of specific goods) in the United States. For example, if the attitudes of the American people were more optimistic at time point I than at time point 11, is it true that discretionary purchases of American consumers were larger following time point I than following II? Tests at the individual level which require interviewing die same people at least twice in succession tell us whether those individuals who expressed optimism or buying plans at the first time point were more likely to make major expenditures during the subsequent period than those who were pessimistic or had no plans to purchase. This monograph is concerned with aggregate comparisons. Data on how various opinions, attitudes, expectations, and plans 2

12 of American consumers have changed from 1953 to 1956 will be related to aggregate consumer demand for automobiles and other durable goods. In this way, values and limitations of measurements of the consumer outlook will be tested. Studies which are being carried out, at the individual level, on functional relations among the various psychological variables and between psychological variables and economic action are, with few exceptions, not included here. This decision was made partly in order to accelerate this publication. An analysis of how motives, attitudes and expectations influence spending and saving behavior would far transcend the scope of a brief report. More important, the reader who is interested in recent economic trends and in finding out what psychological data have contributed to business cycle analysis in the recent past is not necessarily identical with the reader who is interested in economic theory and in tests, made preferably in mathematical form, of the independent function of attitudinal variables. The Economic Behavior Program of the Survey Research Center The Economic Behavior Program, initiated more than ten years ago, may be divided into two closely related sets of activities. One of them is the utilization of the sample survey method for the collection of those economic statistics for which the survey technique' is uniquely suitable. Secondly, the Program endeavors to contribute to economic as well as socio-psychological analysis by studying the decision-making processes of consumers and businessmen and their underlying factors. The first activity may be illustrated by referring briefly to the purchase of automobiles. From automobile registration data it is known how many new cars are purchased in different regions of the country in a given period. But only through surveys conducted with representative samples of families can such questions as the following be answered: Who bought cars? How did buyers of new cars in a given period differ from buyers of used cars, from people who bought a year earlier, and finally from those who have not bought recendy? The term who refers to the income, occupation, age, assets, debts, inventories and many other characteristics of buyers and nonbuyers. Furthermore, the conditions of purchaseprice, trade-in of an old car, borrowing need to be ascertained through surveys and related to the same characteristics. Instead of purchases of automobiles, data on other important consumer transactions or on the distribution of consumer assets and debts, or of income and income changes could have been used 3

13 as examples. We shall not elaborate further on the function of surveys as a unique technique of collecting economic data and of analyzing their relationships. Rather we shall raise the question whether consumer purchases of automobiles or other consumer transactions can be fully understood by analyzing the traditional economic variables (income, assets, stock of cars, prices, etc.). The Economic Behavior Program of the Survey Research Center originated in the conviction that a socio-psychological analysis of the decision-making process will contribute to the understanding of consumer behavior. Studies carried out in pursuing this conviction represent the second set of activities of the Program. The studies conducted by the Program fall into four groups. The oldest and largest are the Surveys of Consumer Finances conducted annually in cooperation with the Federal Reserve Board. At present, early in 1956, the eleventh annual survey is under way. The largest part of these surveys is devoted to the first category of the Center's activities, namely, the collection of statistics on consumer income, debts, and major transactions. In addition, a few questions on consumer attitudes and intentions to buy are regularly included in the surveys. Extensive reports of survey results are prepared by the Federal Reserve Board and published in the Federal Reserve Bulletin. Occasionally they have been supplemented by an analysis of various aspects of consumer behavior on the part of the Center staff. Two books which summarize the theoretical insights won from the surveys may be mentioned in this connection: Psychological Analysis of Economic Behavior by George Katona, and Contributions of Survey Methods to Economics written by staff members of the Survey Research Center and edited by L. R. Klein. 8 Occasional surveys conducted for business organizations or government agencies on specific topics of interest to them and theoretical-methodological studies financed through foundation grants represent two other means through which the Center attempts to accomplish its objectives. Among the topics of special surveys purchases of one-family houses, government savings bonds, life insurance, and common stock, as well as studies of travel and of decisions to purchase household goods may be mentioned. Analysis of decision making by business firms through interview surveys also falls into this area. Among the surveys intended to clarify theoretical issues, a long-term project initiated recendy under a grant from the Ford Foundation is of primary importance. A representative sample of urban consumers was interviewed in June 1954 and has been interviewed every six months since that date. The major purpose of this undertaking is to study origin as well as effects of changes in attitudes and expectations at the individual level. This 4 2 Bibliography: No. 6 and No. ff.

14 project is intended to test the relationship between attitudes and expenditures of the same individuals. The fourth major activity of the Economic Behavior Program consists of the periodic surveys on economic attitudes which are reported in this monograph. The Surveys of Consumer Finances are conducted only once a year. This is deemed to be frequent enough for measurements of the distribution of income, assets, or large purchases. But economic attitudes need to be determined at more frequent intervals since they may undergo more frequent changes. The Surveys of Consumer Finances, because of the multitude of objectives covered and the necessity not to extend individual interviews unduly, inquire only about a small number of economic attitudes. The periodic surveys, which are privately financed, have more room for attitudinal inquiries because they do not follow the Surveys of Consumer Finances into the area of collecting financial statistics. In order to obtain data on the distribution of income, for instance, the Surveys of Consumer Finances use at least thirteen questions about money earned by each spending unit in the sample. In the periodic surveys only a single question is used. It is not designed to obtain exact data on the distribution of income but to enable us to relate the attitudinal data to the approximate income level of the families who hold certain attitudes. The same considerations apply, often to a still greater extent, to other financial data. Attitudes, on the other hand, are measured by a much larger number of questions in the periodic surveys. The surveys conducted by the Survey Research Center are characterized by the use of the fixed question free answer interviewing method. The periodic surveys are based on extensive interviews, lasting one hour on the average and conducted in a conversational way. The questionnaire is prepared in advance, and sequence and wording of the questions must be stricdy adhered to by the interviewers. Some few questions call for a "yes" or "no" answer or for a choice between given alternatives; some other questions are open-ended and are answered by respondents in their own words. Both types of questions are supplemented by probing. "Why do you say so?", "What do you have in mind?" are the most frequent probes and some of the most important questions in an interview based on the fixed question free answer method. A second characteristic of the Survey Research Center's work is the use of representative samples. Being interested in measurements of the frequency of variables and the strength of their interrelationships as they prevail in a given universe, samples representative of the chosen universe are used. Representativeness, with limits known in advance, is achieved through the use of probability sampling. The universe of the periodic surveys (as well as of the 5

15 Surveys of Consumer Finances) consists of all private households in the continental United States. 3 For each of the periodic surveys a new representative sample was drawn. This procedure differs from the panel technique where the same respondents are interviewed in successive surveys. For the measurement of trends in attitudes the panel method is not only unnecessary, but would be less suitable. The size of the sample in the five periodic surveys conducted in the years 1953, 1954, and 1955 varied between 1000 and 2000 families. In 1955, when the surveys were better known, it was possible to use a sample size of over 2000 families in each survey. The size of the samples is important because the sampling error decreases with an increae in sample size (although the decrease is far less than proportional and the sampling error depends on other factors as well). For this reason, the tables in this monograph which present survey data indicate the number of cases on which they are based. The sample size is important also because the larger the sample, the more detailed can be the analysis o subgroups of the population. The sample sizes chosen for the periodic surveys were deemed sufficient because these surveys are mainly concerned with data relating to all Americans or to such broad subgroups of the population as lower and upper income people. Moreover, the kind of data collected changes in attitudes and expectations are such that sampling errors of several percentage points are usually tolerable. Larger samples are needed in surveys intended to measure, say, mean income or-mean debt, since their value is greatly affected by a relatively small proportion of tire sample. Intricate considerations are involved in the selection of the respondent. The best solution depends in each case on the survey objectives. In the periodic surveys the family unit all people related by blood, marriage, or adoption who live in the same dwelling unit at the time of interview was chosen as the unit considered and in each complete family alternately husband and wife were interviewed. The Predictive Value of Data on Consumer Attitudes OUT thesis is that consumer demand, especially for durable goods, is a function of both ability to buy as measured by data on income, assets, debts, and the like, and willingness to buy as measured by attitudinal and expectational questions in surveys. s Appendix B contains a brief description of the sampling methods used, as well as information about sampling variability (sampling error), which arises because a sample rather than the entire universe was contacted each time. The same Appendix also contains more detailed Information on the methodological points raised In the next few paragraphs of the text. 6

16 The purpose of the periodic surveys is to gauge willingness to buy by means of a large number of attitudinal questions. Expressed attitudes are quantified by constructing measures of changes in people's attitudes and expectations from one survey to the next, as well as over longer periods. Reliance on changes rather than on the absolute distribution of answers at a given time is dictated both by survey objectives and the limitations of the survey method. Sample interview surveys are subject not only to sampling errors but also to response errors. There are good reasons to expect that response errors will be much smaller if data from similar consecutive surveys are compared, rather than when conclusions are drawn from data obtained in one survey. A basic rule of survey interpretation is that an answer is a function of the question. This is true even when the questions are worded in a clear and unprejudiced manner. For instance, by changing a few words in questions about future prospects or about satisfaction with income, the answers may be changed. It follows that data about the size or frequency of a variable as derived from a single survey have limited meaning. This statement is reinforced by the fact that response errors loom particularly large with findings from one survey. For instance, a finding such as "The mean consumer income was $ in 1955," in addition to being a function of number and wording of the income questions, is influenced by memory errors and perhaps also intentional misstatements which may not cancel out. The same is true for measures of attitudes which may lead to such findings as "In October 1955, 71 percent of consumers expressed optimism regarding the course of the economy in 1956." In this report changes in the frequency distribution of variables will be emphasized rather than the distributions obtained at one given point o time. The difference between the proportions of people who expect income increases, as obtained from two consecutive surveys, represents a more reliable statistic than the proportion of people expecting income increases at either time. If the same survey methodology is used, there is reason to assume that under- or overstatements because of pride or modesty, as well as the influence of the momentary mood of respondents, will cancel out. A finding, such as "In June 1955 there were more consumers who expected good times than in June 1954," may then be subject to relatively small reporting errors, so that the reliability of the finding can be judged on the basis of sampling variability alone (by finding out whether the difference between June 1955 and June 1954 is or is not statistically significant). The confidence one may put in such a finding may be further enhanced if there is 7

17 evidence of internal consistency. Such evidence is provided, for instance, if the above finding holds for both businessmen and skilled workers but not for farmers (farmers are known to have been subject to special adverse trends in the period under question). Consistency may also be indicated by similar changes in answers to questions which were designed to measure related attitudes, for example short-term and long-term price expectations. When a consumer says to an interviewer that he expects to buy a car early next year or that he expects business conditions to improve during the next twelve months or when X percent of all consumers make such statements this should not be viewed as a prediction of things to come. Questions on these and many similar topics are asked to measure the American consumers' current opinions and feelings. If consecutive surveys disclose that current economic attitudes differ significantly from those registered by other representative samples six and twelve months ago, we conclude that current attitudes are more (or less) optimistic than the earlier ones. Such a conclusion represents useful information for those who wish to make predictions about consumer demand, in conjunction with relevant information on changes in financial variables (in the ability to buy). To be sure, current consumer attitudes might undergo a change in the near future. Yet past experience indicates that consumer attitudes and expectations hardly ever change abruptly, except under the impact of major events which become widely known. It is commonly understood, of course, that attitudes have no predictive value if, shortly after completion of a survey, war unexpectedly breaks out. To a lesser extent the same is true of the impact of a substantial change in consumer credit terms or in the prices of major items, such as automobiles or residential construction provided this change was not anticipated at the time of the survey and takes place shortly thereafter. Sometimes, lack of fulfillment of indications derived from a consumer survey may even be the best possible outcome of such surveys. To illustrate: If at a given time survey indications are for widespread restraint in spending and therefore business firms intensify their marketing efforts and change their products and prices so as to stimulate buying, it may happen that the predictions derived from the survey are not realized. What this means is that consumer expenditures do not depend on consumers alone (on their ability and willingness to buy), but are also influenced by business (and government) action. The relative importance of financial and psychological factors in the business cycle varies from time to time. Surveys of consumer attitudes are of the greatest significance if they reveal a change in 8

18 the direction of trends rather than the continuation of prevailing trends. At the turning points in consumer demand extrapolation of past income and sales data will not yield correct predictions, while consumer attitudes may indicate that such extrapolations are hazardous. When no major-changes are in the making, the reader of survey results may think that the study of consumer attitudes was superfluous. This is an incorrect conclusion. Only after having access to data on consumer attitudes may one conclude that extrapolation of past trends may be relied upon because attitudinal data do not indicate any likelihood of change in prevailing trends. Studies of consumer attitudes and expectations have shown that both situations do occasionally occur. In other words, sometimes consumer attitudes conform and sometimes they do not conform with past income and business trends. The latter was the case, for instance, in 1951 when following large consumer purchases attitudinal data indicated mounting concern with the future and restraint in spending, or in June 1954 when following a slight recession, data on attitudes indicated increased willingness to purchase durable goods. On the other hand, in June 1955 the situation was different: The momentum generated during the preceding few months was then carried over to the near future. 4 Prediction of forthcoming economic developments may be concerned only with the direction of change or, in addition, with the magnitude of change. Attempts to answer the questions "Will the economy move up or down?" or "Will prevailing trends continue or is a reversal imminent?" reflect the first concern. "Will the indicated upward or downward trend be large or small?" or "How large will the forthcoming changes be?" are questions which relate to the second problem. It has been found during the past few years that predictions of consumer behavior derived from attitudinal and expectational data were more satisfactory when they concerned the direction rather than the magnitude of forthcoming developments. If income expectations or the general economic outlook show statistically significant improvements between time periods I and II, the reliability of our measures of the direction of the change is far greater than that of the extent of the change. This finding was not unexpected. We discussed the restricted meaning of the magnitude of onetime measurements of consumer optimism or pessimism; similar 4 The theoretical position stated here, according to which expressed expectations and intentions are to be viewed as attitudes prevailing at the time of the survey, was first presented in No. B (aee especially page 174f) and No. 7 (sec especially pages 58-59). Por a recent extensive discussion of this point see the paper by George Katona Businete Bcopectation* in the Framework of Psychological Boonomioe, presented Iri October 1&65 at the Pittsburgh meeting of the Social Science Research Council and to be published by that organisation. 9

19 arguments may be advanced about measurements of the magnitude of indicated changes. Reflection on the meaning of attitudes and expectations expressed by individual respondents leads to the same general conclusion. It is probable that people often have distinct notions about being better off, or of expecting improvements in their own and the country's situation, without having reflected about the extent of change. Expectations are sentiments to which, subjectively, we seldom attach numerical values. Our attitudinal data measure changes in the diffusion of optimistic and pessimistic attitudes among the American population, but they do not measure changes in the intensity of feeling. It is unlikely that there exists a simple correspondence between the diffusion of an attitude and its strength. First, the intensity of attitudes may well vary with the environmental stimuli which gave rise to them. Secondly, to be sure, attitudes which are accepted by a large proportion of people tend to be reinforced through mass communication; on the other hand, compact minority groups will intercommunicate and may hold their opinions strongly. It may be argued that degree of optimism (or pessimism) can be gauged, at least roughly, by the number of optimistic (or pessimistic) answers people give. In other words, if people reply optimistically to a large battery of attitudinal questions, we are probably justified in concluding that they are more optimistic than if the answers to a number of related questions vary. It follows that answers to different attitudinal questions should be considered in combination. Although combination of attitudinal measures raises difficult problems for example, that of weighting we shall proceed along these lines by presenting an experimental index of attitude change in Chapter 6. It is possible that many more years of experience with attitudinal measurements will enable the investigators to transform indications of forthcoming changes in the direction of trends into measurements of the magnitude of those changes. But even if such endeavors should prove unsuccessful, the predictive value of data on consumer attitudes would be large. For as students of the business cycle we are primarily concerned with the direction of trends. Where traditional business cycle analysis which the survey method intends to supplement needs to be improved most is in finding out whether prevailing trends will continue or whether a turning point is in the offing. We have presented the psychological thesis that expressed intentions reflect current attitudes rather than indications of things to come; we have also stated that the predictive value of attitudinal data is contingent upon the absence of important external developments which are not foreseen by consumers. It follows that predic- 10

20 tions derived from attitudinal data must be relatively short-range predictions. How far into the future may these short-range predictions extend? The best answer we can give in the light of recent experiences and the analysis of the fulfillment of individual intentions is: six to nine months. It appears that the time perspective of most consumers sets such relatively short limits to economic analysis derived from consumer expectations. To be sure, some of our notions extend much further into the future. Furthermore, as will be shown in the next chapters, as investigators we repeatedly ask questions about expectations extending five years ahead. It is not impossible that at a later stage of research the predictive value of attitudinal indicators may be extended. But at present even five-year expectations are asked in order to obtain data about current attitudes. Asking attitudinal questions about the more distant future serves primarily to bring forth answers which are less affected by situational constraints. In a certain sense this study may be viewed as an inquiry into the predictive value of consumer attitudes. Let us therefore emphasize that prediction is not the only and probably not the major purpose of measurements of attitudes and expectations. The principal step toward understanding behavior will be accomplished when functional relations between psychological variables and action variables can be established. The Plan of this Monograph The survey data on consumer opinions, attitudes, and expectations may be presented in several different ways. It would be possible, for instance, to proceed chronologically presenting first all the available data for the earliest period under consideration 1953 in our case then all data for the next period, and so forth. This is not the plan of this monograph. In two respects we shall proceed differently. First, we shall start with the recovery in 1954, rather than the 1953 recession. Regarding the upswing and its antecedents, our material is fairly extensive and is based on several surveys conducted at strategic intervals. In 1953, on the other hand, only one periodic survey was conducted, in the fall of that year. Since by that time the downturn in economic activity was clearly visible, data from that survey cannot give us any information about the origins of pessimistic attitudes nor can they test the question of whether consumer attitudes served as advance indicators of forthcoming economic developments. Therefore, the next chapter (Chapter 2) will present the major materials available to us namely, the information about the antecedents of the II

21 upswing and about trends in Thereafter, Chapter 3 will discuss the. less extensive information on the 1953 recession. The data included in those two chapters will consist of attitudes toward personal finances, toward national business conditions, and toward buying conditions in certain specific markets. A somewhat different approach to the study of consumer inclinations to buy, based on questions about intentions to purchase large consumer goods, will be presented in Chapters 4 and 5 dealing with automobile and housing demand. Then in Chapter 6 we shall attempt to bring together the available information by constructing a composite index of attitudes which includes attitudes toward personal finances and economic conditions as well as buying intentions. Finally, in Chapter 7 we shall discuss the role of the consumer sector in recent economic fluctuations. 12

22 2 Recovery and Prosperity in THE period extending from the peak in economic activity to the late winter of 1955 may be divided into two quite distinct parts: the recession and the forceful expansion which began in the fall of We shall be concerned in this chapter not only with the upswing but also with its antecedents earlier in 1954 when production and employment were quite stable, but at a level below full utilization. Nonsurvey Data The downturn showed signs of levelling off in the spring of But during the next half year business failed to recover. Business analysts reported that the downswing had been arrested, but they could not report that the reduction in the demand for goods and services by the Armed Forces was being offset by an increase in demand originating among businessmen and consumers. "Stabilization" and "readjustment to a normal balance" were expressions used to describe the prevailing situation. The following quotations from two widely read economic publications may serve to illustrate the tenor of the analysis: Fortune, January 1954: "The projections (decline ending in late 1954 or 1955), to be sure, assume that some positive economic forces will come into play as offsets to further declines in the rate of defense spending until late At the moment it would appear that these offsets will be increases in public works and exports. Indeed, no other new demand factors are at present in sight." National City Bank's "Monthly Letter of Economic Conditions," June 1954: "Taking general market activity into account as well as the production index, it now seems plain that March was the low point of the business decline. The turn for the better has not been sharp and current indications favor stability rather than a marked rise." 13

23 Production and employment figures describe most clearly the situation which prevailed in the spring and summer of The index of industrial production had declined from a peak of 137 in July 1953 to 123 in March It fluctuated between 123 and 125 from March through September Non-agricultural employment fell very little, but it fell continuously from the early summer of 1953 until the late summer of October was the first month which showed a reversal of the downward trend in employment. Aggregate personal income had fallen only slightly during the recession, having been supplemented by unemployment insurance and other social security payments. It reached its lowest point in the first quarter of 1954 and began to turn upward already in the second quarter. However, it did not attain its highest pre-recession level until the fourth quarter of Disposable income, boosted by a tax cut in January 1954, did not decline. However, despite the tax cut it advanced by less than 1.5 percent from the third quarter of 1953 to the third quarter of The beginning of the upswing is probably best dated in October 1954, when a vigorous recovery got under way. From the third quarter of 1954 to the third quarter of 1955 gross national product increased by 9 percent, and the index of industrial production rose by 14 percent. Personal incomes attained a level that was 7 percent above the level not only a year earlier but also at the previous peak in mid Disposable income increased to the same extent. Employment was slow to share in the upward movement. From October 1954 to March 1955 increases in employment lagged behind the growth in the labor force. In consequence unemployment remained substantial until the spring of What part did consumers play in these developments? This question can be answered in two ways: (I) by referring to data on aggregate discretionary expenditures and on the ratio of spending to disposable income; and (2) by analyzing survey data on consumer attitudes, expectations, and buying plans. Before we turn to survey materials, which form the principal subject of this chapter, we may examine the aggregate data. During the spring and summer of 1954 consumer reluctance to make postponable purchases diminished gradually. Expenditures on durable goods, the most volatile part of consumer spending, increased slightly, but did not return to their pre-recession volume until the last quarter of Conversely, the ratio of saving to disposable income declined. It had reached a peak of 8.6 percent in the first quarter of From there it fell to 7.4 percent in the second quarter, and to 6.5 percent in the third. In the fourth quarter of 1954 consumer spending rose sharply, 14

24 and it continued to advance at a rapid pace throughout In fact, consumers provided the much-needed "new demand factor" whose absence Fortune Magazine had deplored earlier in the year. The most dramatic gains occurred in sales of new automobiles; but other types of postponable purchases also showed substantial increases. From the third quarter of 1954 to the third quarter of 1955 disposable personal income rose by 17.2 billions while consumer expenditures, supported by a great expansion of installment credit, rose by 18.1 billions. The ratio of saving to disposable income declined further from 6.5 to 5.8 percent The aggregate data presented so far become available only with a time lag of several months, and they are useful primarily for an analysis of past trends. We shall now supplement this analysis by presenting survey data on consumer attitudes. In the pages which follow we shall attempt to show that these data can throw light on the opinions, motives, and expectations which underlie the autonomous actions of consumers. Secondly, we shall examine when and to what extent survey data gave advance indications of changes in current trends. Survey Data on People's Attitudes toward their Financial Situation Two of the periodic surveys were taken in 1954 the first one in June, when economic analysts were still unable to envisage an early recovery, and the second in October, at the very moment when, as became evident later, the upswing was getting under way. In 1955, again two surveys were taken, one in June and the other in October. In each survey measurements of consumer attitudes were made primarily in four broad areas: (1) people's attitudes toward their personal financial situation, (2) people's opinions of the national business oudook, (3) evaluations of market conditions and price trends, (4) intentions to purchase durable goods. We shall examine each of the first three groups of data in turn. (The trend of buying intentions will be analyzed in later chapters.) The financial situation of American consumers had not suffered greatly in the recession. This is indicated by aggregate data on personal incomes as well as by survey measurements of people's own notions about their economic status (see Chapter 3). Since there was relatively Iitde deterioration during the recession, it is not surprising that people's attitudes toward their personal finances did not show much improvement in June Nor is it surprising, in view of persisting unemployment, that there was no improvement between June and October In reply to the question "Would you say that you and your 15

25 family are better off or worse off financially than you were a year ago?" 30 percent of all people answered "better" in June 1954 and 25 percent answered "worse"; the rest felt that their situation was unchanged (Table 1). We see that the excess of favorable over unfavorable changes was only slightly greater than in September 1953 and smaller than in November The most interesting point, however, is that throughout the period favorable responses outnumbered the unfavorable. This finding contrasts with findings obtain- Table 1 Consumers' Evaluations of Their Financial Situation as Compared with a Year Earlier Evaluations of Nov.-Dec Sept.-Oct. June " Oct. June Oct. financial situation Better off 28% 26% 30% 30% 34%- 36% Same Worse off Uncertain Not ascertained 1 All cases 100% 100% 100% 100% 100% 100% Number of cases The question was: "We are interested in how people are getting along financially these days. Would you say that you and your family are better off or worse off financially than you were a year ago? How is that?" * Less than one-half of one percent. ed earlier during the Korean war. From the outbreak of the Korean war until the fall of 1952 more people had reported that they were worse off than had reported that they were better off. When unemployment began to decrease in the winter of , strong feelings of optimism and satisfaction came to the fore. People's evaluations of their financial situation registered a sharp turn for the better in June 1955, followed by a levelling-off between June and October At first glance the improvement may appear rather small. However, for different questions the amplitude of possible fluctuations need not be the same. Obviously, in answer to a question such as "Do you think business conditions are better or worse than a year ago?" at one time a very large majority could say "better," and at another time an equally large majority could say "worse." The possibilities of change are more limited for the question "Are you and your family better or worse off than a year ago?" Even in good times some families will be worse off because of retirement, illness, or other personal misfortunes; and for 16

26 other reasons some families will be better off in bad times. Moreover, at all times there is bound to be a substantial proportion of the population whose situation remains unchanged. To appreciate the magnitude of the 1954 to 1955 improvement in people's reports about changes in their economic situation a comparison with earlier answers to the same question is useful. We find that reports were more favorable in June 1955 than at any other time since 1946, when the question was first asked by the Survey Research Center. In comparing the evaluations of changes in personal circumstances among different income groups (see Appendix A) 1 we find that well-to-do people have been more optimistic than people with smaller incomes. This was true in 1954 and 1955 for practically all the attitudes measured in this series of surveys. A question about recent income changes yielded a less favorable picture in 1954 than the broader question about changes in the family's financial situation. The frequency of the report "Our income went up" did not increase from the fall of 1953 to June 1954; nor did it increase between June and October At the same time the reply "We are making less than a year ago" continued to rise in frequency until October 1954, probably reflecting continuing unemployment and a shortened work week in industry. Between October 1954 and June 1955 a sharp reversal in trend occurred. A greater proportion of families said that their earnings had risen, fewer families that they had declined (Table 2). Table 2 Change in Income as Compared with a Year Earlier Recent Nov.-Dec SepL-Oct. June Oct. June Oct. income changes Increase 38% 29% 27% 28% 34% 37% No change Decrease Not ascertained All cates 100% 100% 100% 100% 100% 100% Number of cases The question -was: "Are you people making as much money now as you were a year ago, or more or less? How is that?" Although in 1955 more people than at any other time in the postwar period felt that their financial situation had changed for the better during the previous year, income increases had been more i All tables showing changes in opinions and expectations by subgroups of the population (income,' occupation, and age groapu) are presented in Appendix A. 17

27 frequent at some earlier dates. The explanation lies in the recent stabilization of the cost of living. From 1946 to 1952 income increases were numerous, but people often felt that they were offset, or more than offset, by price advances. Thus the proportion of people who had received income increases exceeded the proportion who felt better off by a substantial margin. In 1954 and 1955 the two sets of figures were more similar. Table 3 illustrates this changing relationship between reports on income changes and Table 3 Relation between Reports on Recent Income Change and Evaluations of Recent Changes In Financial Situation June 1951 June 1955 Recent Income Change Recent Income Change Evaluations of No No financial situation Increase Change Decrease Increase Change Decrease Better off 52% 7% 3% 66% 18% 12% Same Worse off Uncertain Alt cases 100% 1009b 100% 100% 100% 100% Number of cases For questions: See Tables 1 and 2. reports on changes in the family's financial situation by contrasting June 1951 with June Saying that income increased but that the family was not'better off was relatively frequent in 1951; reports of making less but not being worse off were not infrequent in Reports comparing the present to the past financial situation are not purely "factual", but are determined in part by feelings of optimism and satisfaction. Nevertheless, experiences in terms of dollars and cents strongly influence the answers. Hence questions relating to the past and present must be supplemented by questions relating to the future, which are affected less by situational factors. Expressed expectations are useful not as the respondent's forecast of the future, but as an expression of his current state of optimism and confidence. We find that personal financial expectations exhibit a pattern similar to attitudes referring to the past. These expectations gave no indication in 1954 that a greater willingness to buy was developing among consumers. From October 1953 to October 1954 no change occurred in replies to the question "Do you think that a 18

28 year from now you people will be better off financially, or worse off, or just about the same as now?" Between October 1954 and June 1955 people's optimism about their financial prospects grew markedly. There was no further gain between June and October 1955 (Table 4). However, since incomes continued to increase, the answer "We will be better off" may have had a more favorable connotation in October. Table 4 Consumers' Expectations Regarding Their Financial Situation a Year Hencef Expected change in Sept.-Oct. June Oct. June Oct. financial situation Better oft 31% 31% 31% 37% 36% Same V) Worse off Uncertain Not ascertained 1 1 I I The All cases ioo% 100% 100% 100% 100% Number of cases question was: "Now looking ahead do you think that a year from now you people will be better off financially, or worse off, or just about the same as now? Why do you say so?" Less than one-half of one percent. fthe question was not asked in Not.-Dec Despite the similar movements of reports on recent changes and short-term expectations, it is not true that the latter are merely a projection of past developments. To be sure, reports of having experienced an improvement and expecting an improvement, as well as having had no change and expecting no change, were frequent during the last two years. But in this same period there also were many people who anticipated a reversal in their financial situation; and there were others who foresaw a change following a period of stability or stability following a period of change. This point is illustrated by Table 5, which presents averages from five recent surveys. Whether or not optimism about short-term prospects was at a postwar high in 1954 and 1955 cannot be determined since the question was asked for the first time in It is significant, however, that throughout 1954 and 1955 nearly four-fifths of all people believed that their financial situation would improve or remain unchanged during the following twelve months. Short-term changes in people's appraisals of trends in their 19

29 economic welfare can be attributed in large part to variations in business conditions as they are perceived by and affect the individual household. Answers to such probes as "Why do you say so?" or "Why do you expect that to happen?", show that the proportion of families who were better or worse off for purely personal or family reasons was about the same throughout the period under study. But references to such adverse economic developments as lay-offs, Table 5 Relation between Evaluations of Recent Changes in Financial Situation and Expected Financial Situation a Year Hence* Evaluation of Financial Situation Expected change in financial situation Belter off Same Worse off Better off 52% 23% 29% Same Worse off Uncertain All cases 100% 100% 100% Number of cases For questions: See Tables 1 and 4. * Figures shown are averaged percentages from studies made In: October and June, 1950; October and June, 1954; and 8ept.-Oct., shorter hours, loss of overtime pay, lower business profits, and shifts to lower paying jobs were made by 26 percent of people in June 1954 and only 17 percent in October At the same time references to wage increases, longer hours, and similar favorable economic occurrences became more frequent. To understand fully the buoyancy of consumer sentiment in 1954 and 1955, however, one must take a broader view. Undoubtedly a strong undertone of optimism and satisfaction has characterized consumer attitudes in recent years. These underlying feelings of confidence stem from an extended experience with prosperous business conditions which raised the living standards of large groups in the population substantially. It appears that in mid- 1954, and perhaps even during the preceding short recession, this optimistic undertone was disturbed very litde despite some disappointment about current income trends. A few figures may be quoted to illustrate this point.* In June 1954, of all urban families: 3 These percentages should not be read too closely, since a different wording of the questions might hare resulted in somewhat different answers. They are merely Indications of orders of magnitude. 20

30 74% said that they were satisfied with their occupational progress, 68% said that they were satisfied with their standard of living, 58% said that they were satisfied with their income, or more precisely, that their present income was about what they ought to be getting, 57% said that they had never made more money than in June 1954, 51% expected to have a better position and income in a few years (41% thought they would be in about the same situation, and 8% that they would be in a less satisfactory situation). Among lower income people the proportions of satisfied and optimistic people have been somewhat lower than among upper income people; but the differences are not large. Table 6 Subjective Perception of Job Security (Families whos* Head it a Wag* or Salary Earner) Chances of getting Jan.* Oct. June a similar job Good or fairly good 43% 51% 49% Bad qualified Bad Uncertain Not ascertained All cases 100% 100% 100% Number of cases The question was: "Now suppose that you lose your job for any reason during the next few months; what do you think are the chances of getting another job that pays about the same?" * Surrey of Con turner Finances data. Table 6 summarizes replies to the question "Now suppose that you lose your job for any reason during the next few months. What do you think, are the chances of getting another job that pays about the same?" In 1954 and 1955 one-half of all wage and salary earners were confident that they would have no difficulties in finding another job at the same rate of pay. The proportion who had this confidence did not vary significandy between income groups. In October 1954, it was expressed by 51 percent of people with incomes under $3000, 48 percent of people with incomes between $3000 and $5000, and 54 percent of people with incomes of $

31 or more. However, optimism was greater among clerical and sales personnel than among production workers, particularly those in the unskilled classification. About 45 percent of those who were pessimistic about their prospects explained that they were old; some others said that they were in poor health or that their rate of pay was relatively high because of seniority or a specialized skill. The same question had been asked in January 1950, a time of declining unemployment Although the replies were classified somewhat differently in the two surveys, it appears that people viewed their prospects at least as optimistically in October 1954 as at the earlier date. Thus, despite the fact that the recession had brought forth widespread awareness of and concern with unemployment, a large part of the population felt in 1954 that their own jobs and incomes were secure. Survey Data on People's Perceptions of the National Economic Outlook It has been found in past studies by the Survey Research Center that worries or optimistic feelings about the future which are not brought out by questions about the respondent's personal financial situation are sometimes elicited by questions about national business conditions. Opinions and expectations about business conditions are therefore important indicators of consumer confidence. We find that after the recession the economic outlook of consumers improved earlier than their evaluations of their personal financial situation. Optimism about national business trends continued to grow during 1954, the most striking improvement occurring once again between October 1954 and June Table 7 People's Evaluations of Business Conditions as Compared with a Year Earlierf June Oct. June Oct. Current conditions are Better 17% 20% 47% 48% About the same Worse Not ascertained Ail cases 100% 100% 100% 100% Number of cases The question was: "Would you say that at present business conditions are better or worse than they were a year ago? Why do you say so?" t The question waa not asked In 1962 and 19C3. 22

32 A question about past developments "Would you say that at present business conditions are better or worse than they were a year ago?" evoked predominancy unfavorable reports in June 1954 (Table 7). But there was some change for the better between June and October Thus a sizable proportion of people showed awareness of the recent recession, and answers to this question were in line with the indications of major statistical series. Expectations for the future were more optimistic in June 1954 than reports comparing the present with the recent past. In reply to the question "Do you think >that during the next twelve months we will have good times, or bad times; or what?" one-half of all people said "good" and only about 20 percent said "bad"; however, over one-fourth could not give a definite reply. Table 8 shows that the improvement in expectations between October 1953 and June 1954 was very small, but that a pronounced turn for the better occurred between June and October The opinions of upper income people showed a noteworthy improvement already in June 1954 (see Appendix Table A4). When asked the further question "Do you think business conditions will be better or worse a year from now than they are at present?" two-thirds of all people answered both in June and October 1954 that business conditions would remain approximately unchanged; the rest of the people were somewhat more likely to say "better" than to say "worse" (Table 9). Answers to a question about the longer range economic outlook are presented in Table 10. Being less influenced by current Table 8 Business Conditions Expected over the Coming Year Business conditions Nov.- Sept.- expected over the Dcc. Oct. June Oct. June Oct. coming year Good times 56% 47% 50% 54% 72% 71% Good in some ways, bad in others Bad times Uncertain Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases The question was: "Now we shall be talking about conditions in the country as a whole do you think that during the next twelve months well have good times financially or bad times, or what?" 23

33 conditions than expectations regarding the short-term outlook, long-term expectations showed a pronounced decline in pessimism in June Not only were there fewer pessimists in June 1954 than in September 1953, but there were even fewer in October Turning now to the period from October 1954 to June 1955, Table 9 Business Conditions a Year from Now in Comparison to the Preserttf Conditions a year June Oct. June Oct. from now will be Better 19% 20% 22% 18% About the same Worse Not ascertained All cases 100% 100% 100% 100%. Number of cases The question was: "And how about a year from now. would you expect that in the country as a whole business conditions will be better or worse than they are at present, or just about the same?" f The question was not asked In 1862 and 19C8. Table 10 Business Conditions Expected over the Next Rve Years Business conditions Nov.- Sept,- expected over next Dec Oct. June Oct June Oct. five years Good times will predominate 30% 28% 27% 30% 42% 43% Some unemployment and depression Bad times will predominate Depends on cold war. government policy, etc Don't know; nobody can tell U 18 Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases The question was: "Looking ahead further, which would you say is more likely that in the country as a whole we will have continuous good times during the next five years or so or that we will have periods of widespread unemployment or depression, or what?" (If "don't know") "On what does it depend in your opinion?" 24

34 we find that the improvement was sharply accelerated. The changes in consumer attitudes which occurred between these two dates carried consumer confidence in the business outlook, to a higher level than it had attained at the peak. Reports about the direction of recent changes in economic conditions registered a striking reversal of opinions. Whereas in October 1954 the most frequent report had been that times were worse than a year earlier, in June 1955 about one-half of all people felt that times were better, and most of the other people felt that they were unchanged (Table 7). Thus once again large groups in the population seem to have been fairly well informed about recent business trends. At the same time one-year expectations also changed substantially for the better. In June 1955, 72 percent of all people expected good times during the following year. Nearly two-thirds of all people anticipated that times would be about the same in mid as they were in mid-1955; and an additional 22 percent thought they would be even better. The improvement in the longrun oudook was not quite as strong, but here too the answers were more favorable than at the peak. About 40 percent of the American people were confident that prosperity would prevail for another five years. Many other people were uncertain, but relatively few saw a depression or extensive unemployment ahead (Table 10). From June 1955 to October 1955 no further improvement occurred in people's evaluations of the business outlook. Does this levelling off imply that a turning point is in the offing? In order to test the strength of people's confidence in the business oudook, a question was asked in October 1955 which intentionally prompted people to express misgivings: "Do you happen to know about any unfavorable developments which may make the country's business situation worse? (What do you have in mind?)" Only a third of all people could name any unfavorable developments (Table 11). The President's illness, which occurred just prior to the survey, and the 1956 election were referred to by 14 percent of people with incomes under $5000 and by 22 percent of upper income people. High consumer debts, low farm incomes, inflation, speculation, and unemployment were mentioned by less than a fifth of people in the lower income brackets and about a fourth in the upper brackets. The fact that people in the upper income groups could mention more adverse economic factors than low-income people probably should be ascribed to their being better informed, rather than to greater lack of confidence. On the whole, however, the expressed misgivings did not seem to affect people's optimistic outlook. The great majority of those who mentioned the President's illness as a possible adverse factor did expect good times to prevail in the coming twelve months. 25

35 In evaluating the sidewise movement between June and October 1955 of series measuring the general economic outlook of consumers, it must be remembered that these attitudes were already highly optimistic in June A series which measures the volume of economic activity, such as the index of industrial production or total retail sales; could and should exhibit a continuous pattern of Table 11 Awareness of Unfavorable Developments Affecting Business, by Income {October 1965) Family Income All Under $3000- $5000 and Families {3000 $4999 Over No unfavorable developments 66% 74% 68% 56% Unfavorable developments* Eisenhower's illness, elections International situation Low farm income Too much debt Inflation, speculation Unemployment, lack of demand Other ft All cases 100% 100% 100% 100% Number of cases The question was: "Do you happen to know about any unfavorable developments which may make the country's business situation worse? What do you have in mind? Anything else?" The frequencies of specific unfarorable dtvelopments mentioned add to more than the total, because some people mentioned two unfavorable development!. growth. A series which measures consumer attitudes is not capable of moving upward indefinitely. That people's opinions about the business outlook are related to opinions about their own personal prospects can be illustrated in two ways. People who said in June 1954 that times would be "better" or "worse" in another year were then asked "What will that do to you personally?" About 55 percent of those who expected better times answered that this would affect their own situation favorably; and 47 percent of those who anticipated a worsening of business conditions felt that this might well make their own family worse off. Practically all the remaining people said that their own situation would not be affected. Secondly, we may relate people's expectations regarding their own prospects to their expectations regarding the nation's economy. Table 12 shows that in October 26

36 Table 12 Relation between Consumers' Expectations Regarding their Financial Situation A Year Hence and Business Conditions Expected Over the Coming Year Sept.-Oct June 1954 June 1955 Business conditions Expected Change in Financial Situation expected over the coming year Better off Same Worse off Better off Same Worse off Better off Same Worse off Good times 59% 53% 30% 60% 52% 31% 83% 76% 54% Good in some ways. bad in others Bad times Uncertain All cases 100% 100% 100% 100% 100% 100% 100% 100% 100% Number of cases For questions: See Tables 4 and 8.

37 1953 and in June 1954 pessimistic expectations about the family's financial position were more closely associated with pessimism or uncertainty regarding the business oudook than in June It then appears that in good times. unfavorable expectations regarding ones own finances are due largely to personal problems (regarding ones health, debts, expenses, job, etc.); while in bad times unfavorable personal expectations seem to be related to pessimism 1 about the national economic situation. To understand the reasons for people's evaluations of the business oudook in 1954 and 1955 one must first ask "how well were people informed?" We have already noted that a large proportion of people were aware of the decline in business activity from mid-1953 to mid-1954 and of the upturn in the following year. In addition, both in June and in October 1954 a sample of urban families was asked "Has there been any unemployment around here that you have heard of? (If yes) Has it affected many people or just a few?" In June 1954, 70 percent of residents of urban areas replied that there was unemployment in their locality, and the following October 63 percent. At both dates somewhat over one-half of those who reported local' unemployment said that it involved "many" people, and an equally large proportion indicated that they had acquaintances who had become unemployed Of the people who, in June 1954, were pessimistic or uncertain about the economic outlook, one-half referred to the unsatisfactory employment situation lay-offs, lack of jobs, unsteady work, and loss of overtime. This was by far the most frequent consideration. Other factors seen as making for bad times included lack of demand for consumer goods, high prices, cuts in government spending, feelings of uncertainty among businessmen and consumers, and the political situation. None of these, however, were mentioned by more than 10 percent of the pessimists. Urban respondents who said that they were following the business news were asked in June 1954 what news they had heard recendy. Those who said that they had learned that a recession was in progress outnumbered by three to two those who had heard or read that business conditions had begun to improve. This is one side of the picture. It indicates that information about unemployment and the recession reached a sizable part of the population and was salient to many people's views about the business outlook. Furthermore, because of continued unemployment in the summer and fall of 1954, with some people adverse information was only slowly replaced by better news. On the other hand, many people realized that the downturn had stopped far short of a genuine recession. And there remained a widespread feeling of confidence in the soundness of 28

38 the American economy. Most of the people who felt in June 1954 that times would be good in the following year (and one-half of all people were of that opinion) explained that times were good in 1954, that employment was still high, or that purchasing power was large. About 20 percent of the optimists mentioned that there were already sighs of an upturn in business activity. A more striking indication of people's confidence in the stability of the economic system may be found in answers to the following question "Do you think that something like the depression of the thirties is likely to happen again during the next five years or so? Why do you think that?" This question was asked in June 1954, when unemployment was still spreading and when many economic analysts were disappointed about the failure of business to re- Table 13 People's Evaluations of Chance of Another Depression (Junt 1964} Family Income Chance of All Under $3000- $5000 and another depression Families $3000 $4999 over Cannot happen again 60% 48% 59% 71% Cannot happen qualified Uncertain Can happen qualified Can happen Not ascertained All cases 100% 100% 100% 100% Number of cases The question was: "Do you think that something like the depression of the thirties is likely to happen again during the next five years or so? Why do you think that?" cuperate quickly. Nevertheless, 60 percent of all people answered without any qualifications that something like the depression of the thirties could not happen again; another 15 percent were also optimistic but with some qualifications. Only 25 percent of the American people could visualize the possibility of another "Great Depression" (Table 13). Those who were optimistic offered primarily three explanations for their views. The first was the conviction that government policy would and could prevent depressions.' The second was the notion that business and consumers were presendy in a sound financial situation or that current economic trends were favorable. A third common view was that "We (or businessmen) 29

39 have learned how to avoid depressions" or that "The last depression taught us a lot." The much smaller group who saw the possibility of another depression was impressed primarily by signs of unemployment and stagnation in raid In addition, high prices and costs were mentioned with some frequency. Trust in the Government's ability to stabilize the economy also emerged in response to another set of questions: "Do you think the Government can do anything to keep unemployment low and maintain prosperous times? (If yes) What can the Government do to keep unemployment low?" About 70 percent of all people answered the first question in the affirmative, some were doubtful, and only about 10 percent felt that the government cannot do anything. Public works were mentioned most frequently as an instrument of government policy (by 28 percent of all people). In addition, people advocated a wide variety of other schemes ranging from the sophisticated to the naive for example, lowering taxes or interest rates, controlling prices, more foreign aid, less government spending, higher social security payments to the unemployed and the aged, laws to prohibit lay-offs, subsidizing industry, "giving people confidence in the government," etc. Although cutbacks in defense spending were an important cause of the recession, relatively few people mentioned defense spending, foreign aid, or the international situation in explaining their opinions about the economic oudook. In the fall of 1953 only 5 percent of all people referred spontaneously to the cold war, cuts in defense production, or the Korean truce, as reasons for expecting bad times during the coming twelve months; by June 1954 this percentage had fallen to two. When people discussed the oudook for the next five years, references to the cold war and defense were more frequent; but even then nearly 80 percent of all people did not mention these considerations at all. Open-ended probes such as "Why do you think so?" usually evoke considerations which are particularly salient to the respondent. Less salient considerations may be brought forth by providing a stimulus in the form of a direct question. In the present case people were asked "Speaking of business conditions in the country, how do you think they are affected by the way things are going in the world today, I mean the cold war...? Do you think it makes for good times, or bad times, or what?" (Table 14) It has been found repeatedly in the postwar period that many people see little connection between international developments (or even defense spending) and the state of the domestic economy. Hence only 45 to 60 percent of respondents have been able to say clearly that the international situation makes either for good or bad times; the rest have been uncertain, have argued that it has no effect at all, 30

40 or have given "pro-con" answers. In November 1952, among those who could give a fairly definite answer, the opinion that the world situation was making for good times predominated by a ratio of nearly three to one. A year later after the Korean war had ended, opinions about the impact of international developments were about equally divided. By June 1954 the answer "The world situation makes for bad rimes" prevailed by nearly two to one, and Table 14 Effects of the Cold War on Business Conditions* Nov.-Dec. Sept.-Oct. June Oct. June Cold War makes for Good times 30% 21% 15% 18% 29% Good times, with reservations Temporary or artificial good times Good in some ways, bad in others Bad times, with reservations Bad times No effect on business Don't know, can't tell All cases 100% 100% 100% 100% 100% Number of cases The question was: "Speaking of business conditions in the country, how do you think they are affected by the way things are going in the world today, I mean the cold war....? Do you think it makes for good times, or bad times, or what?" In 1952 the question referred to "Korea and the cold war"; in 1953 it referred to "the truce in Korea and the cold war"; in 1954 to "the cold war, Russia, Indo-China"; in 1955 to "the cold war, Russia, Formosa". * The qneation was not asked In October many people referred to mounting unemployment. A year later, opinions had reversed themselves again: Those who saw benefits for the economy flowing from world conditions outnumbered those who saw unfavorable effects, by more than two to one. We may conclude that people reply to the direct inquiry about the impact of the cold war in a more or less post hoc fashion. They see favorable effects when times are good, unfavorable effects when there is unemployment. Only a small proportion of people have a real conviction that an economy in which defense production plays an important role is unsound or unstable, or conversely, that defense production creates income and employment. 31

41 Survey Data on Opinions of Market Conditions Opinions about prices, quality, new features and designs, credit terms, and the availability of purchasing power enter into people's evaluations of market conditions. Much of the improvement in consumers' willingness to buy between October 1953 and June 1954 seems to be attributable to growing satisfaction with these conditions. Attitudes in this area and plans to purchase durable goods showed the earliest indication that a strong upturn in consumer buying was in prospect. However, it should not be thought that opinions of market conditions, being more closely related to buying, are necessarily more decisive than people's feelings about their own financial situations and the business outlook. Nor should this conclusion be drawn from the fact that evaluations of buying conditions improved earlier in than other attitudes. People's willingness to buy is determined by the interaction of many attitudes; and there is no evidence at the moment which would permit us to conclude that any one of them is consistently more influential or a better advance indicator than the rest. Opinions Table 15 Opinions of Buying Conditions for Large Household Goods Table 15 shows the trend of answers to the question "Now about things people buy for their house I mean furniture, house furnishings, refrigerator, stove, TV, and things like that Do you think now is a good time or a bad time to buy such large house- Nov.- Dec SepL- Oct June 1954 Oct June 1955 Oct Good,or very good, time to buy 26% 36% 43% 45% 55% "55% Good time in some ways, but not in others; it depends IS 12 9 Bad, or very bad, time to buy Don't know Not ascertained 4 3 ' All cases Number of cases 100% 11SS 100% % % % % The question was: "Now about things people buy for their house I mean furniture, house furnishings, refrigerator, stove, TV and things like that. Do you think now is a good time or a bad time to buy such large household items? Why do you say so?"

42 hold items?" The question was first asked in early From then until November 1952 the reply "It is a bad time to buy" was considerably more frequent than the reply "It is a good time to buy" primarily because of dissatisfaction with what were thought to be high prices. In the fall of 1953 favorable and unfavorable evaluations occurred with about equal frequency. From then until mid-1955 a continuous and marked improvement in evaluations of buying conditions took place. By June 1955 favorable evaluations outnumbered critical appraisals by three to one. A parallel improvement occurred in people's opinions of buying conditions for automobiles (Table 16). Table 16 Opinions of Buying Conditions for Automobilest Sept.-Oct. June Oct June Oct. Opinions Good, or very good, time to buy 29% 40% 45% 50% 49% Good time in some ways, but not in others; it depends Bad, or very bad, time to buy Don't know Not ascertained ' 4 2 All cases 100% 100% 100% 100% 100% Number of cases The question was: "Do you think now is a good time or a bad time to buy an automobile? Why do you say so?" ttae question was not asked in Nov.-Dec. 19B2. The reasons which people gave to explain their evaluations of buying conditions for household goods are presented in Table 17. It appears that the improvement in attitudes horn the fall of 1953 to June 1955 was brought about primarily by satisfaction with the opportunity to make "good buys". The unfavorable judgment "prices are too high" and the expectation "prices will be lower later on" declined. On the other hand there was a sharp increase in the favorable opinions that prices are low or reasonable and that large discounts are available. The same reasons were used to explain the increasingly favorable evaluations of buying conditions for cars. From June 1955 to October 1955 people's judgments of buying conditions remained unchanged. However, if the answers are broken down by income groups, we find some further improve- 33

43 ment in the reports of the lower income group, no change in the middle income groups, but less favorable appraisals among people with incomes of $5000 or more (Appendix Table A6). The explanations which people in the upper income groups gave to support their opinions suggest that the decline in favorable appraisals Table 17 Reasons Given for Opinions of Buying Conditions for Household Goods "Good time to buy" Nov.- Dcc Sept.- Oct June 1954 Oct June 1955 Oct Prices going up, or not coming down 6% 6% 6% 7% 7% 10% Prices lower; discounts higher; over-supply of goods Prices are stable, or not too high People can afford to buy now Credit easy to get Quality good, attractive new features "Bad time to buy" Prices are high Conditions now are uncertain, or bad times ahead Prices will fall People can't afford to buy now All cases * * * * * * Number of cases 1133 For question: See Table * The percentage distribution of reasons for each opinion relates to the percentage of respondent! who mentioned each reason. Since some respondents gave two reasons and others gave one reason for and one against, the sum of these percentages exceedb the percentage holding each opinion. was connected with their perceptions of price trends. The adverse judgment that prices are "too high" showed a slight increase compared with June, while the favorable judgment that prices are reasonable, stable, or not too high decreased in frequency among upper income people. 34

44 Price Expectations Concurrently with the improvement in evaluations of buying conditions, the expectations of price stability became more pronounced. In 1951 between one-third and one-half of all people had expected price increases for food, household goods, and clothing during the coming year. And such expectations were often associated with criticisms of buying conditions and worries whether increases in income would match increases in the cost of living. By contrast throughout 1953 and 1954 there were few people who expected prices to go up. Most people thought either that prices would stay unchanged or would go down slighuy in the short run as well as over a period of several years (Tables 18, 19, and 20). These.expectations prevailed among all income groups. Price expectations, in contrast to most other attitudes, did not vary greatly in 1954 and 1955 between income groups. Table 18 Price Changes for Household Goods and Clothing Expected over Next Year Nov.- Dec. Expected change in prices 1952 June 1954 Oct June 1955 Oct 1955 Will riset 6% 14% 11% 12% 25% 33% No change expected or some rise, some fall Will fallf Uncertain; depends Not ascertained 1 I All cases Number of cases 100% % % % % % The questions were: "What do you expect prices of household items and cloth, ing will do during the next year or so stay where they are, go up, or go down?" (If any change at all is mentioned) "Do you think that prices will be a lot higher (lower) or only a little higher (lower) next year?" Sept.- Oct Less than one-bait of one percent. t Moat of the people In these groups expected prlcea to rise (or to fau) "a little"; during the period under study those who expected prices to rise "a lot" never exceeded 8 percent, and those who expected prices to fau "a lot" oerer exceeded 2 percent In June 1955 the price expectations data registered a substantial change. About one-fourth of all consumers anticipated that prices of automobiles, household goods, and clothing would rise during the coming twelve months At the same time the proportion 35

45 of people who thought that prices would fall, or that discounts on household goods and automobiles would increase, declined. Similarly, longer range expectations also became somewhat more inflationary. The origin of this change in price expectations is not entirely clear. The June survey started when negotiations regarding the guaranteed annual wage were already under way. The UAW's con- Table 19 Price Changes for Automobiles Expected Over Next Yearf October June October Expected change in prices Will rise 10% 26% 37% No change expected S Will fall Different movements for new and used Uncertain; depends Not ascertained All cases 100% 10*% 100% Number of cases The question was: "Now about auto prices.what do you expect they will do in the next twelve months or so?" t The question was not asked In the three earlier surveys. tract with the Ford Motor Company was signed about a third way through the interviewing period. We find that the expectation that car prices would rise was somewhat higher immediately before the agreement than it had been in October 1954; for'household goods and clothing it was considerably higher (Table 21). After the Ford setdement the expectation that prices would rise increased sharply for cars and less markedly for household goods and clothing. In October 1955 the percentage of people who expected price advances was above the average for June, but not above the percentage for the later weeks, following the Ford settlement. One might infer that a round of wage increases was anticipated already before the Ford settlement, and that this explains the more inflationary price expectations in early June. Alternatively, the fact that expectations of price increases. for household goods and clothing rose substantially before the setdement and were much less affected by the signing of the contract than car price expectationsmight suggest that some other factors also were influential. Predic- 36

46 tions in the press and on the radio, for example, or people's perceptions of current price trends might have had an effect. Another difficult question concerns the effect of changes in price expectations on people's willingness to spend. Past studies have indicated that most of the time price expectations have only a small influence on consumer demand, unless large price changes Table 20 Price Changes Expected over the Next Five Years Nov.- SepL- Expected price Dec Oct. June Oct. June Oct, level five years from now Will be: Higher 5% 11% 12% 15% 26% 28% About the same Lower Depends on cold war, government policy, etc ' 18 Don't know; nobody can tell Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of. cases The question was: "Looking ahead further do you expect that, say, five years from now prices of the things you buy will be higher than they are at present, lower, or just about the same?" (If answer is "don't know") "On what does it depend in your opinion?" are anticipated. In June and October 1955 practically everybody who expected prices to rise expected only a small increase. At certain times, however, expectations of small price increases have tended to make for postponement of plans to buy durable goods. Some people argued in the past "If prices go up, we can't buy" and explained that in that case they would need to spend more on food and other necessities. 8 In 1954 the Center asked people who expected price increases "Do you think this (expected price increase) is to the good or to the bad?" Two-thirds, answering from the consumer's point of view, argued that price increases are bad. (Conversely, about two-thirds of those who expected prices to decline s Pgr further discussions of this problem, see No. 6, p. I«5 and ISff; No. 7 pp. 70-7B; No. *, pp

47 said that "this is to the good".) Thus expectations of price increases may make people hesitant to buy. However, since people's reactions to price increases seem to depend on the surrounding circumstances, it does not follow that price advances, which may occur in the period ahead, will necessarily reduce postponable purchases. Table 21 Price Changes Expected during Next Twelve Months, by Date of Interview in May-June 1955 DATE WHEN INTERVIEW WAS TAKEN May May 30- June June June 20- Expected change in prices June July 1 A. FOR HOUSEHOLD GOODS AND CLOTHING Prices will rise 25% 20% 23% 31% 32% No change expected Will all Uncertain; depends Not ascertained I 1 I 1 All cases 100% 100% 100% 100% 100% Number of cases B. FOR CARS Prices will rise 15% 19% 35% 39% 88% No change expected Will fall Different movements for new and used Uncertain; depends IS Not ascertained I All cases 100% 100% 100% 100% 100% Number of cases For questions: See Tables 18 and 19. * Less than one-half of one percent. Note: This table should be regarded as suggestive, rather than conclusive. People interviewed within each week do not constitute representative samples; therefore the five columns are not strictly comparable. We do know that even after four years of virtual stability in the cost of "living, concern with inflation still prevails. In June 1955 the Center asked a sample of urban families what kinds of things they worry or are concerned, about. They were shown a list which included such items as war with Russia or China, the cold war, inflation or increases in the cost of living, too much government spend- 38

48 ing, unemployment, depression or recession in the near- future, a decline in business profits. People could indicate worry or concern about as many or as few of these items as they chose. It turned out that many more people worried or were concerned about inflation or increases in the cost of living than about any other domestic economic item on the list. Only 27 percent of urban families said that they were not concerned about rising prices. That there exists some inflationary bias among very many people was suggested also by the following findings. In a survey conducted in September 1955 people were asked what food prices have done during the preceding twelve months. Slighdy over 50 percent answered that they were stable. Most of the others said that they had advanced slighdy, and only a few that they had declined. As is well known, food price indexes showed a decline for the same period. Attitudes toward Installment Debt In late 1955 some economic analysts feared that despite rising incomes and people's satisfaction and confidence, the prevailing high level of consumer debt might make for postponement of purchases of cars or other durable goods during While none of the surveys under study investigated ability to buy or the distribution of consumer debt, the October survey did contain questions designed to measure subjective reactions to the level of indebtedness.* Families who said that they have some installment debt roughly 45 percent of all families were first asked whether they found it a hardship to make the required payments. Those who answered this question in the negative were then asked whether, because of their debt, they might have to postpone other purchases. The answers of families with installment debts are summarized as follows: Our payments are a hardship 26% We have to postpone other purchases 55 We always spend carefully 12 Our payments don't bother us 22 Uncertain or not ascertained 5 All families with installment debt 100% About one-fourth of installment debtors, or about 12 percent of all families, complained that their payments were a "hardship". When people's reactions to their debts were related to the size of their incomes and the amount owed, it appeared that the frequency of the answer "It is a hardship" is much more dependent on the 4 Distribution of income, debt, and repayments are determined in the Surveys of Con earner Finances, No

49 level of family income than on the amount of debt. It was given by 44 percent of debtors with incomes under $3000 but by only 13 percent with incomes of $5000 or more. Postponement of purchases because of debt was reported by about one-fourth of debtors in the middle and upper income groups and again seems to be little influenced by the size of debts, These results are difficult to evaluate as yet since no earlier data are available which might serve as bases of comparison. In the aggregate in October 1955, intentions to buy durable goods do not seem to have been affected greatly by current debts. 8 Families with debts had buying plans more frequentiy than families without debts. This finding, which has been obtained also in earlier surveys, reflects the fact that families with installment debt tend to be at a stage in their life cycle where needs and desires to make major outlays for durable consumer goods are strong. However, among families with debts, in every major income bracket the group who felt their payments as a hardship expressed purchasing intentions less frequendy than those for whom it was not a hardship. But there was no difference in buying intentions between those who stated that they had to postpone purchases because of their debt and those who said they did not feel bothered by their payments. A crucial question in evaluating the consumer outlook for 1956 is whether the group who felt their debt as a hardship was significandy larger than in previous years. It is not possible for us to answer this question, but it does appear to be probable that the "hardship" group has grown somewhat in the course of Summary Changes in a variety of attitudes and expectations during the years 1954 and 1955 have been discussed in this chapter. Can a summary measure of attitude change be computed by combining the opinions registered in answers to individual questions? In Chapter 6 of this monograph we shall attempt to do so and to compare the resulting index of changes in consumer attitudes with measures of changes in consumer spending. It may be useful here to summarize the material presented in this chapter by comparing the movements of the three groups of attitudinal measures from 1953 to 1954 and How did the observed changes in people's attitudes toward their personal financial situation, toward the economic oudook, and toward market conditions compare at various times? Chart 1 should be helpful in answering this question. The top part of the Chart summarizes the change in attitudes between the fall of 1953 and June Looking first at people's re TOT trend a of data on purchasing intentions, see Chapter 4.

50 CHART I Changes in Consumer Attitudes during the Period of Recovery and Expansion, * PERSONAL FINANCIAL ATTITUDES Evaluation! of recent change in financial situation Reports on recent Income change Expected change in financial situation ATTITUDES TOWARD BUSINESS CONDITIONS Opinions regarding one-year outlook Opinions regarding five-year outlook ATTITUDES TOWARD MARKET CONDITIONS Evaluations of buying condition* for household goods Attitudes toward price trends PERSONAL FINANCIAL ATTITUDES Evaluations of recent change in financial situation Reports, on recent Income change Expected change in financial situation ATTITUDES TOWARD BUSINESS CONDITIONS Opinions regarding one -year outlook Opinions regarding five-year outlook ATTITUDES TOWARD MARKET CONOITtONS Evaluations of buying conditions for household goods Attitvdts toward price trends PERSONAL FINANCIAL ATTITUDES Evaluations of recent change in financial situation Reports on recent Income Changs Expected change in financial situation ATTITUDES TOWARD BUSINESS CONDITIONS Opinions regarding one-yeor outlook Opinions regarding five-year outlook ATTITUDES TOWARD MARKET CONDITIONS Evaluations of buying conditions for household goods Attitudes toward price trends A.JUNE, I954C0MPARE0 WITH OCTOBER,I9S3 ^pyyrsi Y/ArA 8 OCTOBER, COMPARED WITH OCTOBER, 1953 J 5^ C JUNE COMPARED WITH OCTOBER, 1993 X Deterioration K> X Improvement HO 'SSS//SSSS//S/SSS, For method used to compute percentage improvement or deterioration in the attitudinal indicators, see Chapter 6 below. 41

51 ports about and attitudes toward their own financial situation, we do not find a definite change either for the better or for the worse. Two attitudes included in this group improved very slighdy, but the reports on recent income changes deteriorated significantly. The other two major areas in which attitudes were measured did show clear signs of greater optimism in June True, the improvement in expectations regarding the one-year economic oudook for the nation was small; but it was reinforced by a larger change in the same direction in five-year expectations (and also by a much greater improvement in the one-year oudook of upper income people, which is not shown in the chart). People's evaluations of buying conditions were much more favorable in June 1954 than in the fall of And more people had come to expect price stability or even a small price decline, expectations which in the past have proven to be conducive to spending. That this satisfaction with opportunity for "good buys" coincided with greater frequency in buying intentions will be shown in Chapter 4. The second part of Chart 1 compares attitudes four months later, in October 1954, again with the fall of The October survey confirmed and reinforced the indications of the June surveythat a decided improvement in consumer attitudes was taking place. By October people's economic oudook had grown much more optimistic, and evaluations of buying conditions also had become more favorable. People's attitudes toward their personal financial situation still showed no change for the better. No generalizations for other periods should be drawn from the lag in personal financial attitudes in For one thing, these attitudes had deteriorated relatively little during the recession. For another, they undoubtedly reflected the particularly slow advance in employment which characterized the early phases of the 1954 recovery. The bottom part of Chart 1 illustrates the accelerated growth in optimism by June All attitudes but price expectations improved strongly. Comparison of those 1955 attitudes which have been measured throughout the postwar period with earlier dates suggest that consumer optimism may have reached a postwar high in the summer of From October 1954 to June 1955 personal financial attitudes participated fully in the upward movement. Between June and October 1955 consumer expectations and confidence were maintained at this very favorable level but optimism did not increase further. At the same time growing concern with rising prices was indicated and some reservations arose because of the proportion of people who felt that their debt payments caused them hardship. The probable meaning of the sidewise movement in consumer attitudes from June to October 1955 will be discussed in the last chapter of this monograph. 42

52 3 The Recession in 1953 The Setting TOTAL gross national product, representing the value of all goods and services produced in the country, after having risen considerably in 1952 and the first half of 1953 reached a peak of 369 billion dollars in the second quarter of In the third quarter GNP amounted to 367 billion, in the fourth quarter to 360, and in each of the first three quarters of 1954 to about 358 billion dollars. During this time, in winter , corporate profits fell and unemployment rose. In retrospect most economists seem to agree that this downturn, one of the shortest and mildest recessions in American economic history, resulted from a reduction in government cash expenditures following the truce in Korea and a cut in business inventories. That economic trends had taken a turn for the worse was widely known by the fall of What was not known at that time was that the recession of 1953 would be recorded in the economic annals as a short reversal rather than the initial phase of a severe depression. This chapter will study consumer attitudes in the fall of 1953 with a view to finding out whether opinions and expectations of consumers gave any indications about the prospective role of this sector in either deepening or mitigating the recession. The question raised here can be made still clearer by referring to some contemporary statements. We may quote, for instance, the most extreme view as expressed by the well-known Australian economist, Colin Clark, who wrote in the Manchester Guardian in November 1953: "Once everybody is engaged in cutting back inventories because sales have fallen, because somebody else has cut back inventories, because his sales have fallen... we are involved in a process which goes on and on of its own account until the economy has fallen to an extremely low level." i This and the following flffurea are seasonally adjusted annual rates. 43

53 Although few American experts appear to have felt that this view was applicable to the American situation in 1953, it is worth keeping in mind the notion of the "vicious circle" as well as the other rather widely held opinion that a "postwar depression" always occurs, even though it is sometimes delayed for many years. Turning specifically to the consumer sector, we may point out that in the fall of 1953 there was widespread uncertainty about consumer reactions to news about the recession. The New York Times at that time quoted a business leader as follows: "The psychological reaction of consumers would largely determine whether business would keep on booming or slip into recession." In this statement two ideas are implied which represent basic tenets of the research work undertaken by the Survey Research Center. They may serve to focus the discussion in this chapter. The first is that consumers are in a position to influence economic fluctuations, and the second is that consumer psychology greatly affects consumer action. It is regrettable that no survey was undertaken in the summer of 1953 when, as became evident later, the recession started. From another point of view, however, the fall of 1953 represented a strategic time for conducting a survey. Up to that time, in spite of certain adverse developments in the government and business sectors, consumers as a whole had not suffered. Personal incomes and consumer expenditures remained stable in the third quarter of It was not until the winter of that wages and salaries began to decline due to rising unemployment and a shorter work week. Similarly, the most volatile part of consumer expenditures, those on durable goods, began to decline only in the fourth quarter of Thus there was every reason to study consumer attitudes and expectations with great interest in October, Before discussing the October findings, let us recapitulate briefly the trend of consumer sentiment in the years prior to 1953 as it became known from surveys conducted in 1951 and Military setbacks after the outbreak of the Korean war strongly influenced economic attitudes. Fear of a.third world war, of shortages and of inflation led to stocking up and hoarding. The situation changed again early in The American people learned that a stalemate had developed. The prospect of many years of conflict (cold war) was considered as unfavorable for the consumer, and high prices and high taxes were resented. The change in attitudes resulted in postponement of expenditures and in high rates of liquid saving. BTh«fonowing summary ts based on No. 7. No. C contains a discussion of consumer attitudes and their role prior to the Korean war. 44

54 It was a long time before the American people became reconciled to the price increases which occurred after the outbreak of war in Korea. Inclinations to purchase durable goods grew gradually, most strongly in the second half of At that time, in contrast to 1951, the Korean war was considered as having favorable effects on the domestic economy. Moreover, confidence was widespread that the newly elected Eisenhower administration would stimulate business. Therefore, toward the end of 1952 and early in 1953 all measures of consumer attitudes, as well as buying intentions, pointed toward greater willingness to spend. In accordance with these survey indications, consumer purchases increased substantially during the winter of Decreasing Optimism How did American consumers think of their own and the country's economic situation in the fall of 1953? Or, more precisely, how did consumer opinions and expectations in the fall of 1953 differ from those held a year or two earlier? We shall attempt to answer these questions on the basis of the findings of the October 1953 survey. We shall begin by presenting those opinions and attitudes which show the greatest change for the worse and close our discussion with attitudes that did not deteriorate at all, or even improved, during the year Signs of pessimism regarding business trends were most evident in people's replies to a question about the long-term economic oudook. In the fall of 1953 about one-third of all people said that bad times or depression and widespread unemployment would predominate during the next five years. The proportion saying so was much larger than both one year and two years earlier. Conversely, the frequency of optimistic opinions about business trends during the next five years declined in 1953 (Table 10). 8 Expectations regarding the economic oudook for the near future were considerably more optimistic. In October 1953 more people expected good times than expected bad times during the next twelve months; the reverse was true regarding the five-year oudook. The deterioration of one-year expectations from the end of 1952 to October 1953 was, however, almost as large as the deterioration of five-year expectations (Table 8). A substantial increase in unfavorable opinions and decrease in favorable opinions was also registered in people's answers to a question about the probable effects on business conditions of "the way things are going in the world today." In October 1953 the SThe baric tables containing tbe October 1953 data, and referred to in the tert of this chapter, are to be found la the preceding Chapter 2. 45

55 proportion of people who thought that the truce in Korea and the cold war would mate for good times was about the same as the proportion who thought that they would make for bad times (Table 14). A year earlier, many more people had emphasized the favorable effects of the Korean war on the domestic economy than had thought of its unfavorable effects. Two years earlier, in November 1951, however, evaluations of the effects of the Korean conflict on domestic business prospects were preponderandy unfavorable. A specific question revealed that the changes in people's opinions about the domestic economic effects of international developments could not be attributed directly to what at that time was called the "Russian peace offensive." We asked in October 1953 "During the last few months Russia has made many statements about wanting peace. Do you feel this means we will have less trouble than we have been, or won't it make any difference?" Over one-half of all people said that they did not expect any change in Russian-American relations. Among the remaining people, many Table 22 Expected Change in Next Year's Government Spending (October 1953) FAMILY INCOME All Under $2000- $5000 Expected spending People $ and over Spending will or may be decreased 43% 35% 42% 49% Spending will be the same 12 5 IS 13 Spending will or may be increased Don't know, depends Not ascertained 3 6 S 2 All cases 100% 100% 100% 100% Number of cases The question was: "Do you think that our Government's spending will be increased or reduced next year?" more said that they did not trust the Russians or that they thought we would continue to have trouble with Russia than said that they expected more friendly relations. At the same time, the proportion of people who expected a reduction in government spending exceeded the proportion who expected an increase. As Table 22 shows, about one-half of people in the upper income brackets, who are usually best informed, thought that government spending would be reduced during the 46

56 next year. This opinion was in accord with the news reports of the time and was attributed either to a cut in defense spending, or to economies in government operations instituted by the Eisenhower administration, or to both. In explaining their opinions regarding current or expected business conditions a sizable, proportion of all people mentioned signs of a forthcoming depression. Some people were disturbed by layoffs of workers or by reports about producers and merchants who were overstocked. Some were impressed by rumors of an impending depression which they encountered in the press, on the radio, or on TV. In rural areas the decline of farm prices appeared to worry farmers as well as businessmen. Altogether, about 40 percent of all people did talk at some point during the interview of some such unfavorable signs. Thus we must conclude that information about an unfavorable turn in business trends, which either had already started or was impending, was widespread. But only a minority of people who showed some awareness of unfavorable business trends expressed the opinion that during the next twelve months "we'll have bad times." Especially upper income people, who usually have more information and express themselves more fully than others, spoke frequently of signs or rumors of an impending depression, yet expressed optimism regarding the business outlook. In summary, we may conclude that many people had thought or heard about a possible slow-down in business activity; but far fewer people were sufficiendy influenced by this information to turn pessimistic. We shall therefore have to ask: What were the forces which prevented the majority of people from becoming seriously concerned over the possibility of a depression in 1954? Favorable Attitudes in the Fall of 1953 A strong source of optimism was people's satisfaction with their current financial situation. When asked in October 1953 whether they were better or worse off than at the beginning of the year, 26 percent said better and 24 percent worse, with the remaining 50 percent answering that there was no change or that they were uncertain about any change (Table 1). These proportions did not differ much from those obtained a year earlier; they were slighdy less favorable than in November 1952 and more favorable than in November In an additional question, people were asked how their current financial situation compared with that two or three years earlier; then nearly one-half of all people said that it had improved. Only a fourth thought that they were worse off in October 1953 than two or three years earlier. 47

57 To a question about recent income changes (Table 2), again somewhat more people said that their income had gone up in 1953 (29 percent) than said that it had gone down (18 percent). Compared with the end of 1952, reports about recent income changes showed greater deterioration than reports about recent changes in the family's overall financial situation. This finding does not point to a major source of disappointment or dissatisfaction. In 1952, and especially in 1951, many people complained about price increases and reported that in spite of income gains they were worse off. In 1953 most people felt that prices of things they bought had remained substantially stable and also, as we shall show shordy, that they would remain stable. In view of the experience of price stability, satisfaction with income trends was widespread. Personal expectations for the future were also predominantly favorable. Many more people said in October 1953 that "a year from now" they expected to be better off financially (31 percent) than said that they expected to be worse off (10 percent). No data are available to compare these opinions with those prevailing at earlier dates. But a comparison with answers to the same question as obtained in 1954 (Table 4) indicates that optimism regarding personal finances was relatively widespread in the fall of It was strongest among those who counted on continued prosperity; but it was by no means lacking among those who saw bad times ahead. The expectation of a reduction in personal income taxes was not among the sources of optimism, although such a reduction was widely discussed in the financial press at the time of the survey. Hardly anybody referred spontaneously to tax cuts in explaining why they might be better off next year. When asked the direct question "Do you think there will be a change in the taxes people like you will pay next year?" only 18 percent of all people (28 percent of people with incomes of $5000 or over) replied that income taxes would be reduced (Table 23). It appears then that the increase in take-home pay due to the 1954 tax reductions must have come to many people as a pleasant surprise. One-half of all people, a higher proportion than at any time in 1951 or 1952, thought in October 1953 that prices of household goods and clothing would stay the same during the coming year (Table 18). There was very little feeling of uncertainty about prices in late 1953, in contrast to earlier years. Among those who expected' some price changes, the majority thought that prices would fall a litde. Regarding the oudook for prices over the next five years, by far the largest group with opinions (42 percent of all people) thought that prices of the things people buy would be 48

58 lower "five years from now" (Table 20). There is reason to believe that the prospect of price stability or moderate decline in the long run is welcomed by most consumers and represents a favorable attitude. The experience of recent price stability coupled with expected price stability over the next year is one explanation for the finding that the answers to the question "Do you think this is a good Table 23 Expected Tax Changes for Next Year (October 1953} FAMILY INCOME All Under $2000- $5000 Expected tax changes People and over Income taxes will be reduced 18% s% 16% 28% Other taxes will he reduced 1 S 1 * Taxes will be unchanged (mostly not specified which taxes) SI Taxes will be increased (mostly state or local taxes) Don't know; depends 19 SS Not ascertained All cases 100% 100% 100% 100% Number of cases I02S The question was: "Do you think there will be any change in the taxes people like you will pay next year?" (If yes) "What kind of change?" * Less than one-half of one percent. time or a bad time to buy large household goods?" were more favorable in the fall of 1953 than toward the end of 1952, and much more favorable than in 1951 (Table 15). The favorable shift was most marked among the less well-to-do (Appendix Table A6), but still in these groups more people were inclined to say that times were not opportune for buying than that it was a good time to buy. Among people with incomes of $5000 or over, the opinion that it was "a good time to buy" predominated; the improvement among upper income people was, however, negligible in The answers to a question asking for an evaluation of buying conditions for cars were similar. In studying the reasons for opinions of buying conditions we find, as mentioned earlier, that people were aware of price stability; therefore they became accustomed to the prevailing price level, and the proportion of people who felt that prices were "too high" 49

59 declined. In addition, many people considered the time opportune for buying durable goods because they knew of and were attracted by clearance sales or discounts. Thus it appears that the availability of "good buys" was crucial in maintaining favorable attitudes during the recession. There was, however, a small minority whom the expectation of declining prices led to be cautious and hesitant in current spending. Summary The relatively favorable judgments about conditions for buying durable goods and about the family's personal financial situation must be interpreted jointly with the less favorable trends indicated by people's economic outlook. There is no doubt that in October 1953 American consumers looked into the future with less confidence than "at the end of But the shift toward pessimism was not substantial and consumer sentiment was still favorable to a high level of expenditures. On the whole, it was as favorable as two years earlier. Chart 2, which was constructed in the same way as Chart I in the preceding chapter, illustrates these points. It shows the kinds of questions which registered improvement and the kind which registered small or large turns toward pessimism between December 1952 and October The Chart also makes it possible to view the trend of attitudes over a somewhat longer period. It appears, on the whole, that attitudes associated with inclinations to buy were not more pessimistic in October 1953 than in June The beginning of this chapter referred to notions about a "psychological recession." We quoted some analysts who feared that the psychological reaction of consumers to a small recession and to rumors of overproduction and depression would deepen the downturn or even create a large-scale depression. It appears from the findings of the October 1953 survey that these notions were not justified. No doubt, what people are told by others and also what they read in the papers and hear over the radio and television has some influence. But most people are not swayed easily by hearsay in vital matters in which they have personal experiences. It appears that attitudes which underlie people's spending behavior are usually based both on their own experiences and the news which reaches them. In October 1953 the majority of consumers had not accepted the rumors of an impending depression because of their satisfaction with their personal progress and with stable prices. 50

60 CHART 2 Changes in Consumer Attitudes during the 1953 Recession* OCTOBER, 1953 COMPARED WITH PERSONAL FINANCIAL ATTITUDES A. Novtmhef - December, 1952 Evoluotions of recent change tn financial situation Reports on income change ATTITUDES TOWARD BUSINESS CONDITtONS Opinions recording ont-year out took Opinion* regarding five-year outlook Opinions regarding effect* of ttw Cold War on business conditions EVALUATIONS OF BUYING CONDITIONS FOR HOUSEHOLD GOODS R JUNE, 1952 PERSONAL FINANCIAL ATTITUDES Evaluations of recent change fn financial situation Reports on recent income change ATTITUDES TOWARD BUSINESS CONDITIONS Opinions regarding one-year outlook Opinions regarding five-year outlook EVALUATIONS OF BUYING CONDITIONS FOR HOUSEHOLD GOODS % Deterioration % Improvement -30 " For method used to compute percentage improvement or deterioration in attitudinal indicators, see Chapter 6 below. the 51

61 Thus in a certain sense the results of the October 1953 survey presented grounds for optimism. Students of business trends who saw signs of an impending depression were confronted by the sane, confident and, on the whole, optimistic attitudes of the people. On the other hand, the survey results must have been disappointing for those who had expected consumers to increase their rate of spending, thus providing an offset to declining business and government spending. The indications derived from the survey, as expressed in the winter of 1953, were "that the volume of consumer spending in the months ahead, though it will remain a sustaining force for business activity, may well fall short by a small margin of the high level which it attained in 1953". - * No. t, January 1954, p

62 4 Automobile Demand Measurement of Buying Intentions ASKING questions which are intended to reveal changes in consumers' perceptions, attitudes, and expectations regarding their own personal welfare or the country's economic situation is not the only method that may be used to collect information on consumer inclinations to buy. The basic assumption of these studies that changes in consumer optimism or pessimism influence the rate of discretionary and postponable consumer expenditures suggests that the problem at' hand may be attacked more directly. In order to find out whether inclinations to buy automobiles or other large household goods have become stronger or weaker, what would be more natural than to ask consumers about their intentions to purchase automobiles and household goods and tabulate changes in the rate of expressed intentions? This approach to the study of prospective consumer demand was begun immediately after the end of World War II in the Surveys of Consumer Finances conducted cooperatively. by the Survey Research Center and the Federal Reserve Board. The same question which has been asked at the beginning of each calendar year in the Surveys of Consumer Finances has also been used in the periodic surveys discussed in this report. The question in the Survey of Consumer Finances reads: "Do you expect to buy a car this year, in 19...?" Like all questions in those surveys it is asked of each spending unit separately, while in the periodic surveys the question is addressed to the whole family. In the periodic surveys, which are not conducted at the beginning of a calendar year, the question reads: 'Do you, or does anyone else in the family, expect to buy a car during the next twelve months or so?" In both series of surveys respondents answer in their own words, and the replies are classified into the following four categories: will buy, will probably buy, might buy but undecided, will not buy. All respondents who answered other than "will not buy" are then asked: "Will it be a new car or a used car?" 53

63 We shall report first on the frequency of expressed intentions to buy automobiles in the periodic surveys conducted between 1953 and Table 24 presents the raw data. The upper part of the table shows the different degrees of probability attached to expressed intentions, without making any distinction between intentions to buy new and used cars. The lower part of Table 24 shows the trend in buying plans for new and used cars without reference to degree of probability. Table 24 Intentions to Buy Automobiles, (Percentage distribution of families who expressed buying intention* for the next twelve months In the periodic surveys) Stated intentions to buy automobiles October 1953 June 1954 October 1954 June 1955 October 1955 A. PLANS BY DECREE OF PROBABILITY Will buy 8.6% 10.6% 12.6% 11.3% 11.6% Probably will May buy, but undecided Will not buy Not ascertained All cases 100.0% 100.0% 100.0% 100.0% 100.0% B. PLANS FOR NEW AND USED CAR PURCHASES* (by those who will, probably will, or may buy) All families with buying plans 13.8% 17-4% 20.4% 185% 18.6% New cars N.A U Used can N.A Number of cases The questions were: "Do you, or does anyone else in the family, expect to buy a car during the next twelve months or so? (If yes) Will it be a new car or a used car?" Of the families who were undecided whether they would boy new or need, onehalf were allocated to new, the other half to ama. The table shows that during the first half of 1954 a substantial change took place in consumers' attitudes toward buying cars. 1 Even though it is possible that automobile buying intentions are subject to some seasonal variations, as will be discussed shordy, the findings of June 1954 justified the conclusion expressed at that i According to the table the change took place between October 1968 and June The baying Intentions data obtained in the January 1954 Survey of Consumer Finances were, however, quite similar to those of the October 1958 survey. Therefore, tbe time during which the change occurred can be specified more closely. 54

64 time in a public report that "consumer attitudes toward automobile buying have improved substantially." The October 1954 survey indicated clearly that this improvement was not a temporary or passing phenomenon. Although the possibility that intentions to purchase automobiles are more frequent in the fall when new models are being introduced could not be ignored, the October 1954 data pointed toward great strength in automobile demand. It is by now economic history that during the months following the October 1954 survey the automobile purchases of the American people increased greatly and far exceeded predictions derived from projections of past relationships. By June 1955, when intentions to buy automobiles were again determined and could be compared with those obtained in June 1954 without fear of being misled by seasonal fluctuations, automobile sales exceeded every previous record. Buying intentions as measured in June 1955 were only slightly higher than those of June 1954, the difference not being significant The rise in the frequency of expected automobile buying intentions which was apparent from June to October in the year 1954 was not repeated from June to October in the year In October 1955 we find only a' very small improvement against June And the October 1955 intentions to buy new cars were about 10 percent lower than those of October Comparison of Buying Intentions with Car Registrations It is possible to present data on automobile buying intenuons over a longer period of time and to add observations by using the data in the periodic surveys jointly with those obtained in the Surveys of Consumer Finances. Expressed intentions to buy new cars in the Surveys of Consumer Finances can be transformed from a spending unit basis to a car basis by multiplying the proportion of spending units who express intentions to buy by the number of spending units in the country. Similarly, the transformation of the data in the periodic surveys from a family basis to a car basis can be carried out by multiplying the proportion of families with buying plans by the number of families in the country. Thus it is possible to calculate for each survey an estimate of the number of new cars (or used cars) that are expected to be purchased during the next twelve months. Such calculations are useful primarily for methodological purposes and should not be regarded as exact predictions. If we want to compare these estimates with data on actual car purchases or new car registrations as they become available twelve 55

65 months later we have to be aware of certain differences. The method of calculation described above for the Surveys of Consumer Finances disregards the possibility that one spending unit may intend to buy more than one car. This occurrence is relatively rare, and no correction was applied for it. The method of calculation used for the periodic surveys disregards the possibility that one family may intend to buy more than one car. From data available in the Surveys of Consumer Finances it was evident that this second possibility may call for some correction, even though the order of magnitude involved was on the average only 0.2 million cars during the last few years. Much more serious problems arise from the nature of the samples used. First, the institutional population and transients are omitted from the survey samples. Since transients, at least, do buy cars, the intentions data should be expected to be lower than the actual purchases. No data are available which would permit correcting for this discrepancy. Second and most important, automobiles are bought by business firms and governments (federal, state, local) which are not included in a consumer sample. Exact data are not available on the proportion of purchases made by the nonconsumer sector. It may fluctuate from year to year but has been estimated on the average at 14 percent of new car sales by the automobile industry. The trend of expressed intentions to purchase automobiles is compared in Chart 3 with new car registrations during the following twelve months. The chart presents, in addition to the trend of car registrations, two lines for expressed intentions. One depicts intentions to buy new cars (with the assumption that one-half of those prospective buyers who were uncertain whether they would buy a new or used car should be considered as planning to buy a new car). The other line presents the index of all prospective automobile purchasers, those who plan to buy a new car plus those who plan to buy a used car, plus those who plan to buy a car but are not sure whether it will be new or used. In 1955 there was an increase in uncertainty among prospective automobile buyers whether they would purchase a new or used car; therefore it might be argued that the trend of inclinations to purchase automobiles is best expressed by the data for all can. The two lines representing intentions to buy new cars and all cars always change in the same direction, although occasionally there are differences in the indicated size of increase or decrease. The chart can be read without making any assumptions about the size of business and government purchases of automobiles. For that purpose expressed intentions to buy cars are presented in 56

66 index form, 1950 being equal to 100 (see left-hand scale). The line representing intentions to purchase new cars, however, may also be read by making use of the right-hand scale, which measures the number of new car registrations. Approximate comparability of the two scales has been achieved by raising the frequency of consumer intentions to buy new cars by 14 percent. The intentions data appear on the chart as of the dates when the intentions were expressed and thus reflect inclinations to buy cars during the next twelve months. The registration data also refer to the subsequent twelve months. In other words, the point for new car registrations set at January 1, 1950 indicates the level of new car registrations during the calendar year 1950; the point on that line as of January 1955, shows registrations from January 1955 to January Intentions data from the June and October 1955 surveys are shown on the chart, but the corresponding registration data for , of course, will be known only a year later. Before describing the findings presented in the chart, a word of caution is called for. Even if expressed intentions always represented definite plans (which they do not) and reporting errors would not exist, complete correspondence between intentions and later purchases were not to be expected. Consumer behavior, as we said in Chapter 1, may be altered by business and government action (for instance, by changes in prices or credit terms, as well as in marketing methods), and unforeseen developments (for instance, breakdown of one's car or unexpected income changes) always take place. Furthermore, expressed buying intentions without regard to other expectations are likely to exhibit less satisfactory relations to subsequent action than answers to several questions. The chart indicates that most of the time expressed intentions to purchase automobiles have provided reliable advance indication of forthcoming changes in automobile buying. In absolute numbers buying plans tend to fall short of later purchases, since unplanned purchases due to sudden breakdowns, accidents, and other reasons tend to exceed unfulfilled plans. Nonetheless, purchasing intentions and subsequent new car registrations show similar period-to-period movements. Early in 1951 it was indicated that automobile demand would drop sharply; new car sales did fall considerably during 1951, although to a lesser extent than indicated. The prospects for 1952 were that automobile demand would remain at the low level of 1951 (or would rise slighdy). In fact, there was a steel strike in 1952, and 1952 sales were lower than the 1951 sales. Early in 1953 intentions to purchase new automobiles were 35 percent more frequent than in early 1952; car registrations increased by a 57

67 I n d " f c a r CHART 3 ^ X ' n, J«! n?950*==* I Too) Relationship between Car Buying Intentions and Subsequent New Car Registrations [J' millions) MOr- IOOBW New Car Registrations During Subsequent 12 Months Intentions to Buy New and Used Intentions to Buy New Cars During Subsequent 12 Months

68 similar percentage in The surveys conducted in October 1953 and early in 1954 revealed a reversal in the trend; sales in 1954 fell, but not quite as much as the frequency of expressed intentions. The findings of the periodic surveys conducted during 1954 and 1955 have already been described. It is clearly evident from the chart that the 1954 intentions proved correct indicators of the great increase in auto sales during It is particulary worth noting that buying intentions showed a substantial increase before the 1955 models were introduced and before any band-wagon effect of seeing many new and attractive cars on the road and in front of neighbors' houses could occur. The 1955 decline in buying intentions cannot yet be checked against subsequent new car registrations, but there are indications that the intentions forecast the direction of change correctly. The forecasting record of the car-buying intentions data is, however, marred by one conspicuous failure which does not appear in the chart: In early 1955 buying intentions, as measured by the Survey of Consumer Finances, were only slighdy above a year earlier and well below the high level attained three months previous, in October Actual purchases were at record levels during the first three quarters of 1955, the period which should Notes to Chart 3 New Car Registrations: Calculated from R. L. Polk & Company data. Expressed in millions of cars (see right-hand axis) for the twelve-month period following the dates marked on the chart. For example, the first point January 1, 1950 indicates the registration* during the calendar year The point of January 1955 indicates the registrations between January 1955 and January Car Buying Intentions: The proportion of spending units expressing intentions to buy cars (will buy, probably will buy, might buy but undecided) in the Surveys of Consumer Finances hat been published in the Federal Reserve Bulletin (see, for instance, supplementary Table 17 of the May 1955 issue). The proportion of family units expressing intentions to buy cart in the periodic surveys is presented in Table 24 in this chapter. The percentages were translated into millions of spending units (or families) and the January 1950 data were made equal to 100 to construct an index (see the left-hand axis). The buying intentions derived from family studies were increased by 0.2 million for total cars and 0.1 million for new can to allow for intentions by secondary related units. The intentions to buy new cars can also be read in millions of cars by making use of the right-hand axis, under the assumption derived from past Btudies that government and business purchases of new passenger cars represent 14 percent of total registrations. In other words, the right-hand axis was placed so as to make it register the number of prospective new car buyers plug 14 percent. New car registrations are available monthly; buying intentions only for the beginning of each year and for the five periodic survey dates. The available survey points were connected by straight Vines. 59

69 have been foreshadowed by the buying intentions. The discrepancy is in excess of probable sampling variation. How can this failure be explained? Does it point to any specific difficulties which must be solved in the future? We turn to a discussion of the comparability of data obtained at different times of the year. The car-buying intentions presented on the chart have not been adjusted for seasonal variations. It is, of course, possible that consumers express a greater willingness to purchase automobiles during the summer (main travel and outdoor recreation season) and in October (large advertising campaigns for new models) than in January. Far too few data are available to test this hypothesis, however. A related and perhaps more serious consideration refers to the form in which the questions are asked. The question "Do you expect to buy a car during the next twelve months?" if asked early in January will be understood to refer to the calendar year and has, therefore, a clear time limit This is not true if the same question is asked in June or October. It is conceivable that some people will answer the question in the affirmative in June even though they plan to buy during the next summer, possibly thirteen or fourteen months hence. More important still, the question asked in June obviously refers to two model years. In October, at the time of the introduction of new models, the same question probably refers to one model year but nevertheless to its entire expected duration of twelve months. When the question is asked in January, some confusion may arise in the respondent's mind between model year and calendar year. Possibly some people will state in January that they do not plan to buy a car "during this year" even though they may be thinking of buying a car of the following year's model toward the end of the same calendar year. Uncertainty regarding respondents' interpretations of the question was particularly pronounced at the time of the 1955 Survey of Consumer Finances. The 1955 automobile models were introduced much earlier in 1954 than the 1954 models were introduced in 1953, and sales of 1955 models had been exceptionally large in the last quarter of 1954, that is, in the months immediately preceding the survey. Therefore, there is reason to doubt the comparability of the January 1955 survey data with those obtained in the periodic surveys. This is why information from the 1955 Survey of Consumer Finances has been omitted from the chart The record of the 1955 Survey of Consumer Finances Is much better than Indicated here in the light of car-buying Intentions alone. All the other attitudinal and expect*, tional data obtained In the survey showed substantial Improvements. Data on expressed Intentions to purchase durable goods should be interpreted Jointly with these other related data. In addition, in 1856 credit terms for new cars eased and the marketing efforts of the automobile Industry were rather substantial. 60

70 The test used in the chart, consisting of a comparison of changes in expressed intentions with changes in actual registrations, is no doubt a "strong" test. It may be mentioned that a weaker and somewhat more simple test reveals still greater correspondence. In the Surveys of Consumer Finances, in addition to car buying intentions, the number of spending units who actually have purchased a car during the preceding twelve months is also determined. Therefore, it is possible to compare car buying intentions as expressed in the early 1952 survey with car purchases as reported in the early 1953 survey for the previous year; intentions from the 1953 survey with car purchases from the 1954 survey, etc These comparisons can be made from Supplementary Tables 1 and 17 in the May 1955 Federal Reserve Bulletin and reveal almost perfect agreement. 3 In preference to these data, registration data were selected for presentation in the chart in order to avoid the impression that car buying data are advance indicators not only of the direction but also of the size of future automobile sales. Expressed intentions to buy automobiles are subjective notions (attitudes) rather than definite commitments which will be fulfilled one-by-one. Hence, our validity check on intentions data is not presented as a definite proof of fulfillment but rather as an indication of the worthwhileness of attitudinal studies. Supplementary Data The forecasting value of the intentions data might be enhanced if the degree of certainty of expressed intentions could be measured better or if probabilities could be attached to people's intentions. No definite solution to this problem has been worked out yet, although it is being studied in two ways. First, as has already been mentioned at the beginning of this chapter, the freely expressed answers to the question "Do you expect to buy a car this year?" are classified into three groups. These groups are reproduced in Table 25 separately for new and used cars. The table indicates that in October 1954 as well as in October 1955 intentions to purchase new cars were expressed in somewhat more definite terms than in June 1954 or June Secondly, prospective car buyers are asked specifically whether they are fairly certain that they will buy a car or not Again, as Table 26 shows, the proportion of "certain or fairly certain" responses was higher in October than in the June surveys (regarding s Intentions tor 1952: fj.8% of spending units; actual pnrcoawa of sew CATS In %. Intentions for 1808, 9.1%i purchases In 195B, 9.1%. Intentions for 1954, 7.9%; parch8sea In %. The Intentions for 1950 (8.2%), however, do not agree with purchases In 1960 (11.0%). 61

71 Table 25 Intentions to Buy New and Used Cars, With Probabilities Attached to Intentions Intentions to Purchase New Cars June October June October Intentions to Purchase Used Cars June October June October Percent of Families 10.4% 10.3% 10.8% 7.0% 8.9% 7:9% 8.3% Thereof: WIU buy Probably will buy May buy, but undecided SO All cases Number of cases 100% % % 185 For question: See Table 24. The respondents' freely expressed answers were classified into the three probability categories by readers of the interviews in the central office. 100% % % % % 134

72 Table 26 Degree of Certainty of Expressed Intentions to Buy a Car (Ptrcentag* distribution of families who will, probably will, or may buy a car) New Cars Used Cars June October June October June October June October Degree of Certainty Certain, or fairly certain that will buy 57% 76% 59% 74% 50% 61% 52% 53% Fair chance that will buy Undecided about buying, but - there is a chance Not ascertained All families with buying intentions 100% 100% ' 100% 100% 100% 100% 100% 100% Number of cases S The question was: (If family expressed any buying intentions) "Are you fairly certain that you will buy a car, or would you say that there is only a chance that you will do so?"

73 Timing Table 27 Expected Timing of Automobile Purchases (Psrcentaga distribution of familui who whi, probably will, or may buy a ear) June 1954 October 1954 New Cars June 1955 October 1955 June 1954 October 1954 Used Can First six months after survey 41% 49% 63% 51% 62% 70% -72% 58% Second six months after survey Uncertain; not ascertained All families with buying intentions Number of cases 100% 1S5 100% % 183 The question was: (If family expressed any buying intentions) "About when do you think you will buy this car?" 100% % % 95 June % 135 October % 134

74 new cars). It is not known whether this difference reflects a change in trend or is due to seasonal patterns. The timing of expected car purchases likewise was studied by means of a specific question; the answers appear in Table 27. It appears that in June 1955 new car buyers more often thought of buying their car within a relatively short time than in June 1954; there was no such difference between October 1955 and October Table 28 Opinions about Timing of Car Purchases in the More Distant Future (Psreantaga distribution of all f«m!ll*s) October June October June October Expect to Buy a Car 195! Within a year H% 17% 20% 18% 19% Within two years IS Within three yean Within four years S Within five years or more, or in a few yean. or in several years 14 II Never, don't know when Ail cases 100% 100% 100% 100% 100% Number of cases The question was: (If family expressed no buying intentions for the next twelve months) "When do you think you people win buy a car, if ever?" The first line of this table "Within a year" is taken from Table 24; the other lines present the answers to this question. Since the planning period for purchases of automobiles is relatively short, it would hardly be useful to attempt to study car-purchase intentions more than one year ahead. An attempt to study attitudes toward car purchases during the more distant future was made, however, by asking all people who did not expect to buy a car during the next twelve months, "When do you think you people will buy a car, if ever?" Close to 40 percent of all families professed to be unable to answer this question or said that they would never buy a car. (A substantial proportion of these people do not own a car now, while most of the others are in the older age groups.) Table 28 presents the distribution of opinions about the timing of distant car purchases. These data may be viewed as an additional measure of inclinations to buy cars. No significant changes seem to have occurred during the years ; but in the surveys conducted during these two years more people 65

75 said that they would buy a car within two years than in October The income distribution of prospective car buyers is presented in Table 29. In 1955 approximately 30 percent of all families had incomes between $5000 and $10,000 and 6 percent had incomes over $10,000. The share of these people in total intentions to purchase new cars is much larger than 30 and 6 percent, respectively, and did not change substantially during the last two years. Table 29 Income Distribution of Those Who Said that They Will, or Probably Will Buy a Car FAMILY INCOME Under $2000 $3000 $4000 $5000 $10,000 New and Used All $ and over N.A. June % October % June % October % New June % II October % June % October % Used June % October % June % October % For question: See Table 24. Some attention was also given to two-car families. It was found that approximately 13 percent of all families owned two passenger cars in Among those with incomes over $10,000 the proportion was over 40 percent, and among those with $5000 to $10,000 incomes approximately 20 percent. Is it probable that the proportion of two-car families will increase rapidly in the near future? All one-car owners were asked whether or not they have given any thought to buying a second car. In reply to this question, in October 1955, IS percent of one-car owners or about 8 percent of all families answered in the affirmative. Only a small 66

76 proportion of these people actually expected to acquire a second car within the next twelve months. Yet they were well aware of their need for a second car, which was ascribed primarily to the distance from home to work. Suburban living obviously increases the need for two cars in the family. Determinants of Buying Intentions So far we have not attempted to explain the observed changes in intentions to buy automobiles. Repeated studies have disclosed that it is of little value to ask respondents directly why they expect or why they do not expect to buy a car. {The most frequent answers to such questions are "I need a new car" or "My present car will do for a while.") Mention was made previously, however, of a different question through which consumers' attitudes toward automobile buying were studied. This question "Do you think this is a good or bad time to buy an automobile?" can readily be supplemented by an inquiry into the reasons for the expressed opinions (Table 16 Chapter 2). The answers disclosed a very substantial improvement in attitudes toward automobile buying from October 1953 to June 1954, as well as some further increases in favorable attitudes from June to October 1954 and to June There exists some correlation between the opinion "This is a good time to buy a car" and expressed intentions to buy a car (Table SO). That the correlation is not very pronounced is not surprising since many people who had bought a car shordy before the interview may understandably give the answers "This is a good time to buy" and "I do not expect to buy" to the two questions. Furthermore, some people are more or less compelled to buy a car and plan to do so even though conditions are, in their opinion, riot opportune. The opinion that this is a good time to buy automobiles was based most commonly on either of two considerations. Some people mentioned the high allowances on trade-ins, the availability of substantial discounts, price wars among producers and dealers or, generally, an oversupply of cars and "good buys." Others said that car prices are stable or reasonable. Contrariwise, by far the most frequent reason given for the opinion that this is a bad time to buy cars was that prices are high or too high. The relationship between intentions to purchase cars and price expectations is of great interest, especially because during the year 1955 price expectations have undergone a substantial change (which has been reported on pages 35-37). As can be seen at the bottom of Table 31, in October 1954 approximately 40 percent 67

77 Table 30 Relation Between Opinions of Buying Conditions for Automobiles and Intentions to Buy Automobiles Opinions of Buying Conditions Stated intentions to June 1954 October 1954 June 1955 October 1955 buy automobiles Good Pro-Con Bad Good Pro-Con Bad Good Pro-Con Bad Good Pro-Con Bad Will buy 16% 8% 11% 15% 13% 11% 14% 11% 8% 16% 13% 9% Probably will I 2 May buy, but undecided Will not buy Not ascertained Ail cases 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Proportion expressing each opinion 40% 9% 35% 45% 5%, 31% 50% 9% 23% 49% 8% 21% For questions: See Tables 16 and 24. * Less than one-half of one percent.

78 Table 31 Relation Between Price Changes Expected tor Automobiles and Intentions to Buy Automobiles Price Changes Expected for Automobiles Stated intentions to October 1954 June 1955 October 1955 buy automobiles Rise No change Decline Rise No change Decline Rise No change Decline Will buy 15% u% 15% 13% 13% H% 13% 12% 14% Probably will I I May buy, but undecided I Will not buy Not ascertained a 1 «All cases 100% 100% 100% 100% 100% 100% 100% 100% 100% Percentage expressing each price expectation 10% 53% 39% 26% 32% 18% 37% 27% 14% For questions: See Tables 19 and 24. * Less than one-half of one percent.

79 of families expected automobile prices to go down while only 10 percent expected them to go up. Price expectations at that time seem to have had a small influence on buying intentions and especially those buying intentions which were not very definite. The relatively small group of people who thought car prices would go up said somewhat less frequently than other people that they expected to buy a car. By October 1955 car price expectations were reversed: Close to 40 percent expected prices to go up and only 14 percent anticipated a decline. At that time no clear relationship between price expectations and purchase intentions was apparent. These few data on considerations that may have contributed to people's inclinations to buy cars in are, of course, insufficient. Additional investigations of the impact o new models and model changes on consumers will be attempted. (Yet it should be kept in mind that the increase in automobile buying intentions shown in the June and October 1954 surveys took place before the 1955 models proved to be successful.) The great increase in the use of installment credit hardly qualifies as an explanation of the increase in intentions to buy automobiles; more probably large-scale borrowing must be viewed as a consequence of the growing inclinations to buy. (Unavailability of credit on acceptable terms, of course, may render inclinations ineffective, while easy terms may help to transform inclinations into effective demand.) Upgrading that is, an increased desire to own newer and better cars may be viewed as an explanation but represents a factor which itself needs to be explained. We know from previous studies that buying intentions are closely linked with other consumer attitudes and expectations. Thus the increase in automobile buying intentions in 1954 coincided with and appeared dependent upon the expectation of most consumers that (a) the next twelve months would show an improvement in the economic climate of the country and that (b) car prices would be stable or fall a little with a continuation of favorable opportunities to buy. Consumer sentiment and expectations also are crucial for the fulfillment of previously expressed expectations. Whether or not buying intentions are realized depends to a large extent on the realization of other expectations (and, of course, on developments in other sectors of the economy). In part intentions data may be viewed as the results of other attitudes which can be measured and explained, in part as an expression of felt need for a specific product. From a scientific point of view, then, intentions data represent a short cut and a very useful short cut But they are most meaningful if they are 70

80 evaluated in conjunction with the expectations which underlie them. Therefore, in a later chapter we shall treat buying intentions as one among several attitudinal indicators and combine them with other attitudes and expectations. 71

81 Appendix Intentions to Purchase Large Household Goods It should be possible to measure intentions to purchase specific articles other than automobiles, provided these articles are usually purchased after a fairly long planning period. Because of this consideration, queries about plans to purchase one-family houses and household durable goods have been included in the Survey of Consumer Finances schedules Postponing the report on house buying plans to the next chapter, it may be mentioned here that one question on expected purchases of "furniture, refrigerator, stove, washing machine, television set and other household appliances" customarily yielded answers that were, for each individual article, much lower in frequency than the actual purchases in the subsequent year. This finding became understandable when it was established in a special study that large household goods are often bought after relatively short planning periods (about one-third after a planning period of less than a few weeks, and a similar proportion after a planning period of a few months). 4 An attempt was therefore made to study the problem of prospective purchases of household goods on a somewhat broader basis. In exploratory studies it was established that questions about goods needed, or about purchases that people would like to make, are freely and extensively answered. In fact, in 1954, 86 percent of all families said that there were some "special expenditures they would really like to make this year or next year." Among families with incomes under $2000 the percentage was 66; the others usually pointed out that they "can't afford anything." Among families with incomes over $5000, 92 percent mentioned some expenditure they would like to make and the remaining few said that they were "quite well provided for." Following this, people were asked to estimate the chance that they would be able to make the desired expenditure during the next twelve months. ("Is it quite certain, or is there a fair chance, a slight chance, or no chance?") In tl way it was possible to make some distinction between dreams and hopes, on the one hand, and needs that had a good chance of being satisfied, on the other hand. This form of inquiry was carried 4 8ee No. 11, p

82 out in the last three periodic surveys, attention being focused on four specific major household goods and on improvements or additions to the home. Separate questions were asked about the plans to purchase each of these articles. The results are presented in Table 32. Further extensive studies are required to determine the values and limitations of this new approach for the measurement of intentions to purchase household goods and especially the merits of the distinction between "felt needs" and demand. For the time being, all that can be reported is that from October 1954 to October 1955 the frequency of inclinations to purchase refrigerators appears to have increased slightly and for washing machines substantially; on the other hand, plans for the purchase of television sets appear to have declined somewhat. Both the middle- and highincome groups contributed to the increase in inclinations to buy washing machines, and all income groups contributed to the decline in inclinations to buy television sets. There can be litde doubt that one question is insufficient for the purpose of clarifying inclinations to buy a commodity. The data presented in Table 32 represent the starting point of studies that have not yet been completed and will be reported later. In those studies information on the age of the presently owned model and opinions regarding its condition will be linked with "felt needs" and the expressed chance of making a purchase. In this way, it is hoped to gain a better understanding of inclinations to purchase and also to clarify the important problem of saturation with durable goods. 5 Moreover, questions are being asked about people's interest in new features or improvements in refrigerators, washing machines and the like, as well as about their interest in newer durable goods such as clothes driers and air conditioners. Through analysis along these lines, which goes beyond purchase intentions (or chances of purchasing) and inquires into the factors contributing to the arousal of needs and demand, we may learn more about fluctuations in the demand for various durable goods. As in the case of automobiles, variations in buying intentions and purchases must also be related to variations in other attitudes and expectations and in people's financial situations. o For a preliminary report on studies of saturation with durable goods, see No. 1. An article by Eva Mueller in the forthcoming Vole mo III of Consumer Behavior will discuss this problem as well as the problem of consumer reactions y'j finnovntlons. 73

83 Expressed desire and chance of realization Among all Families Table 32 Chances of Making Major Household Expenditures During Next Twelve Months* (All families and 3 major Income groups) Purchase Refrigerator October June October Good or fair chance of realization 5.4% 5-8% 6.4% Slight or no chance Among Families with Incomes under $3000 Good or fair chance of realization Slight or no chance Among Families with Incomes of $ Good or fair chance of realization Slight or no chance Among Families with Incomes of $5000 or over Good or fair chance of realization Slight or no chance Number of cases Percentage of Families in Each Group Who Desire to Purchase Washing Machine October June % 6.6% S October % Purchase Cooking Range October 1954 N.A. N.A. N.A. N.A. NA. N.A. N.A. June October % 5.6% S

84 Table 32 (Cont.) Expressed desire and chance of realization Among all Families October 1954 PERCENTAGE OF FAMILIES IN EACH GROUP WHO DESIRE Purchase TV Set June 1955 October 1955 October 1954 Make Improvements, Additions, Repairs to Home June 1955 October 1955 Good or fair chance of realization 9.7% 5.4% 7.0% Slight or no chance Among Families with Incomes under $ % % % 8.7 Good or fair chance of realization Slight or no chance Among Families with Incomes of $ Good or fair chance of realization Slight or no chance 6.7, Among Families with Incomes of $5000 or over Good or fair chance of realization Slight or no chance Number of cases The questions were: "Are there any special expenditures you would really like to make in the next twelve months? Anything else you would like to spend money on for example, a refrigerator? How about TV, cooking range, washing machine, repairs, improvements or additions to the house? (If anything mentioned, ask for each item) What are the chances that you will buy (spend money on) in the next twelve months? Would you say you're quite certain, there's a fair chance, a slight chance, or no chance at all?" * Not available for earlier dates.

85 5 Housing Needs and Housing Demand The Problem IN the summer and fall of 1955 prospective business cycle developments appeared to depend to a great extent on the continuation of high levels of residential construction. Traditionally, residential construction has been viewed as a function of net family formation. Since 1949 with declining marriage rates family formation has declined steadily. It fell from approximately 1.2 million in the first few postwar years to about 800,000 in 1954, while residential construction remained substantially stable in 1952 and 1953 and increased sharply in 1954 and Family formation is not expected to rise before the 1960's. Pessimistic conclusions about homing needs have also been derived from the fact that undoubling, frequent in the first few postwar years, has practically come to an end. According to Census data, in 1955 there were only 1.5 million married couples without their own households as against 3 million such couples in Data from the Surveys of Consumer Finances show that at present adults who live with relatives are mostly either quite young or quite old, have low incomes, and are satisfied with their housing arrangements. In the face of these considerations the recent housing boom has been explained almost exclusively in terms of financing arrangements low down-payments and long payment periods. We will study here subjective motives for the purchase of one-family houses for owner occupancy in an attempt to find out whether these motives are likely to provide support for the housing market during the next few years. Population statistics as well as financial considerations relevant for house purchases will be omitted from this analysis. It will be restricted to a discussion of psychological factors influencing the housing market We shall study the entire market for one-family houses rather 76

86 than the market for newly built houses. There are some prospective house buyers who look exclusively at newly built houses and some others who are interested solely in "old" houses. Recent investigations indicate, however, that for the majority of people there exists only one market and the final decision buying a newly built or an older house is seldom determined in advance by the desire of the would-be purchaser. 1 Table 33 Frequency of Intentions to Purchase Houses during the Next Twelve Months A. PERCENTAGE DISTRIBUTION AMONG ALL FAMILY UNITS June Oct. June Oct. Stated intentions to purchase home Will buy 4.5% 4.7% 5.6% 5.9% Probably will buy May buy, but undecided Will not buy Not ascertained All cases % 100.0% 100.0% 100.0% Number of cases B. PERCENTAGE DISTRIBUTION AMONG FAMILIES WITH INCOME OVER $5000 Will buy 6.0% 6.8% 8.7% 85% Probably will buy 0.8 l.s May buy, but undecided Will not buy 87: Not ascertained 0.9 OA 0.5 Ail cases 100.0% 100.0% 100.0% 100.0% Number of cases The question was: "Do you expect to buy or build a house for your own use during the next twelve months? (If will or may buy) What would you say are the main reasons why you plan to buy or build a house?" In studying prospective housing demand, we may again start with expressed buying intentions. Questions about intentions to purchase houses for owner occupancy during the next twelve months have been asked in the periodic surveys. Positive responses "We will buy" or "We probably will buy" increased steadily in frequency from June 1954 to October 1955; but at the same time the. proportion of families indicating tentative plans "We may buy," "We are undecided" declined (Table 33). Similar questions itbis finding la from a stirrer of ho Que purchases, carried oat by the Survey Research Center on contract with the HHFA In For recent pabllcatioob, see No. It and No. It. 77

87 have been asked in the annual Surveys of Consumer Finances of nonfarm spending units. Special studies reveal that the two series are quite comparable despite some difference in coverage. Therefore, it is worth quoting that the frequency of positive expectations to buy a home was 4.0 percent and of tentative expectations 2.6 percent in January Thus the apparent upturn in house buying intentions began earlier than June In January 1955, according to the Survey of Consumer Finances, the proportions expecting to buy homes were 5.8 and 3.6 percent respectively, representing an approximate midpoint between the October 1954 and June 1955 data presented in Table 33. These data are insufficient to clarify the important problems attached to home buying. Since only a very small proportion of American families purchase houses every year, the percentages expressing intentions are relatively small. The sampling errors attached to these percentages in samples of the sizes indicated in Table 33 are so large that changes from one survey to the next are hardly ever statistically significant Therefore the apparent indications derived from our table are far rom reliable. Because of the small proportions involved and the indefiniteness of home buying plans mentioned before, a separation between intentions to buy newly built houses and older houses would be still more hazardous. Moreover, comparison between house-buying intentions and house purchases carried out during the next twelve months is not warranted because frequendy house buying plans are postponed for considerable periods before they are carried out. (With house buying as well as with purchases of automobiles and other durable goods, there are instances of very short planning periods; in house buying, in contrast to durable goods, there are, however, also many instances of planning periods extending over a much longer period than a year.) Thus, it is not surprising that during the past few years actual annual house purchases were generally lower in frequency than indicated by fairly certain and tentative purchase plans. More important still, we cannot be satisfied with answers to a single question. We would like to obtain more comprehensive information on people's needs and desires to better assess the strength or weakness of future housing demand. We shall approach this problem, first, by studying the motivation behind recent house purchases. Second, we shall study people's felt need for future changes in housing. The aim of this second inquiry is not only to obtain a rough measure of potential mobility but also to relate potential mobility to people's motives and aspirations as well as demo- 3 These data and those for January 1955, are taken from No. II. August 1855, Table 5, p

88 graphic characteristics. Needless to say, house-buying intentions and their fulfillment, just like car purchase intentions, may be modified by changes in people's attitudes and financial experiences. The same is true of people's desires and aspirations. Felt needs for housing, as well as more definite plans to buy, are therefore in a sense additional indicators of consumer sentiment. Reasons for Past House Purchases We shall begin with a schematic classification both of the circumstances under which houses are bought for owner occupancy and new or used automobiles are purchased, excluding purchases for business purposes (Table 34). According to the Surveys of Con- Table 34 Schematic Classification of Broad Reasons for Buying New or Old Reasons Hornet Percentage of total purchases* To have a pace to live+ 10% To live in a different community** To have a more suitable home previous renters previous home owners Automobiles Percentage of total Reasons purchases* To have a cart 20% To have an additional car 10 To have a more suitable car 70 - * The figures, taken from surveys In different recent years, are rough indications of orders of magnitude rather than exact measurements. t Household formation and undoubling. ** Moving to suburbs Is not included In this category. 3 Purchases by non-owners. sumer Finances, car purchases by non-owners young people coming of age as well as older non-owners becoming car owners accounted for roughly 20 percent of the total purchases of new and used cars during the last few years. Another factor in the automobile market is the demand for a second car (or an additional car) in the family; in 1954 this demand represented about 10 percent of automobile buying. (One-third of all privately owned cars are now owned by families who have two or more cars.) It appears then that about 70 percent of automobile purchases by private consumers not of automobile production are due to replacement 79

89 needs, upgrading, or obsolescence, that is, to the desire to exchange ones car for a better or newer or more suitable car. This is, of course, widely recognized by students of the automobile market, who are gready concerned with an analysis of scrappage rates; but it is less often considered that similar circumstances prevail in the housing market. In analyzing housing demand, demolition of existing houses has usually been regarded as of negligible importance. Houses were believed to become uninhabitable at a low rate; in some calculations it was assumed that 1 percent of the over 45 rnillion existing dwelling units become uninhabitable every year, the average life of dwelling units having been set at 100 years. The substantial current rate of conversion and modernization may even reduce this rate. Of course, some dwelling units disappear because of fire, and demolitions may increase because of slum clearance programs and, most recendy, also highway construction. Furthermore, it is known that a great many dwelling units exist today which are classified as substandard. (In 1950, the HHFA estimated that there were 6.3 million substandard dwelling units.) But while substandard automobiles disappear at a fast rate, substandard dwelling units often remain inhabited for a long time. The crucial question we wish to raise is: Is there reason to assume that there now exist replacement needs or upgrading needs of such magnitude that they represent an important additional factor in the housing market? We shall answer this question in the affirmative on the basis of studies of the reasons people give for buying homes as well as their unfilled housing desires. Why have people bought houses in the recent past? Only about 10 percent of newly built and old houses purchased in were bought by newly formed families and families which had just undoubled. (This finding included in Table 34, is from the 1950 study quoted in footnote 1.) Most newly formed families, as well as those who undouble, start out renting an apartment. We find further that in about 32 percent of the house buyers had owned and 58 percent had rented before they purchased houses. Why did they buy? One reason, of course, is the necessity for finding a new home, sometimes because of eviction and primarily because of moving to a distant town. Close to one-fourth of the home buyers fell into this category. It may be useful to refer to some data about internal American migration, since the great geographical mobility of our population may make it easier to satisfy existing needs for better housing. In addition, migration may become a source of demand for housing insofar as it consists of moving from areas with ample housing to areas with scarce housing. Three big population movements, 80

90 from farm to city, from central city areas to suburbs, and "towards the sun" (Florida, southern California), fall into this category. Data about the size of these population movements are practically non-existent, since they cannot be derived easily from differential rates of population growth in different areas. Altogether, according to the Census Bureau, close to 20 percent of the American population moved in each of the last few years. The movement of about 12 percent was within the limits of a city or county, of about 4 percent across county lines, and of a further 4 percent across state lines. According to the 1955 Survey of Consumer Finances about 20 percent of nonfarm families lived less than one year in their present dwellings; about one-fourth of the new occupants bought a house while the others rented an apartment Why do people who do not move from one town to another buy houses? Table 35, which summarizes available information, Table 35 Reasons Given for Buying a Home (Old and Newly Built One-Family House*] 1950 Early 1955 October 1955 Reasons for recent purchasest for buying plans Old dwelling inadequate too small 80% 24% 19% too large Not good enough, not modern enough Neighborhood or location unsatisfactory Desire.to own 29 44* 403 Financial considerations** Other reasons, reasons, not ascertained Number of cases The questions were: In 1950, "What was it that made you think of moving from there? Was there anything (else) about your housing arrangements before you moved that was not satisfactory or that you wanted to improve upon? What was that?" The question was asked' in a survey conducted for HHFA by the Survey Research Center. For the 1955 questions, see Table 33. The data for early 1955 are from the Survey of Consumer Finances; the October 1955 data from the periodic surveys. * Percentages add to more than 100 becanse some people gave two or more reasons t People -who bought a honse becanse they moved to a distant town are excluded. 5 These percentages Include nnantiaj considerations connected with the desire to own a house. "Home ownership cheaper than renting," "Home Ownership Is a good Investment." and the like. 81

91 must be used with caution. First, the questions asked in the surveys have been different, so that comparisons from 1950 to 1955 are not permissible. In 1950 people who purchased one-family houses for owner occupancy during the twelve months preceding the interview were asked, about their reasons for moving from their former dwellings. In the 1955 surveys people who said that they would or might purchase houses for their own occupancy during the next twenty-four months were asked about their reasons for planning to do so. Secondly, answers to questions of "why" cannot be considered as a complete enumeration of all existing reasons. Certain answers may be too obvious to be mentioned; other reasons may be of importance but not salient, and certain secondary reasons may be omitted because a more important reason has already been mentioned. Thus a person who says that he bought a house because his old place was too small may not add that the old house was also "not good enough" or that the desire to own a house also played a role. The reason that the old house is too small may be viewed as a reflection of the rising birth rate (increased number of children), while the reason that the old house is too large probably reflects the need of older people whose children have married and moved away. But it is also possible that many people who said that the old house was too small meant primarily that it was too small under their current financial circumstances. A very substantial proportion (about 60 percent) of our current housing stock was built more than twenty-five years ago, that is, in years in which the American income structure was different from what it is today. The proportion of families with a real income so low as to be close to the subsistence level is now much smaller than before World War II. Many people may now be living in houses which are no longer suited to their present income level. Some evidence for this assertion is found in a study of the distribution of the values of owner-occupied houses in the Surveys of Consumer Finances. 1 Among nonfarm home owners with incomes of over $7500 one-fourth live now in houses valued at less than $12,500, and among nonfarm home owners, with incomes from $5000 to $7500 one-third live in houses valued at less than $10,000. To live in a house worth twice one's annual income represents a very conservative standard, and nevertheless calculations based on that standard indicate that over 3.5 million upper income home owners are now housed below their income standard. It has also been found that a great many families highly value a That home owners' statements about how much their houses are worth are relatively reliable has been shown In No

92 and desire certain modern conveniences such as one-story houses or two or more bathrooms which are rarely found in old houses. We know from direct inquiries and also from an analysis of expenditures for modernization of houses, that such needs and desires have become increasingly important during the last ten years. To bring up ones children in ones own house (to have a backyard in which the children can play), and to enhance ones standing in the community through home ownership these values are emphasized today by a great many people. The desire to live in a "good" neighborhood, that is, to associate with "nice people" and to be distant from juvenile gangs these are likewise considerations which play a very large role. It is interesting to observe that the arguments "The location of the old house was bad" and "We wanted to own our own house" were as frequently mentioned in lower middle income as in upper middle income groups. In the 1950 survey house buyers were asked about the features they looked for first in searching for a house. Location was mentioned by three out of every ten buyers, and this frequency was exceeded only by reference to the size of the house. Under financial considerations such answers as "Renting costs more than owning a house" or "Buying a house is a good investment" have been tabulated. That relatively few people mention financial considerations is explained by the fact that availability of mortgages, current interest rates, and current down-payment requirements are taken for granted by most people. Most prospective home buyers look only at houses in a certain price range and calculate the required monthly charges for the houses in that price range. Concern with changes in these prerequisites of house purchases is relatively rare. In spite of the fact that financial considerations have seldom been mentioned as reasons for purchasing houses, there can be no doubt that higher down-payment requirements and higher interest rates would make it impossible for many people to satisfy their needs for larger or better houses. Housing Needs and Desires Several approaches have been used in this difficult area of inquiry. In the 1955 Survey of Consumer Finances questions were asked to find out whether people felt settled in their current dwellings and, furthermore, whether they considered their present home satisfactory or unsatisfactory. Some owners and many more renters said that they were unsettled in their homes; an additional group said that their home was unsatisfactory. When the relation of the value of the house to income was low, the answer "unsettled and unsatisfactory" was particularly frequent. The data obtained have 83

93 been presented in the August, 3955, Federal Reserve Bulletin (see especially Supplementary Table 7, p. 865),. and have been retabulated for urban families in Table 36.* A somewhat different approach has been used in an investigation in which an attempt was made to study people's feelings of accomplishment and frustration, as well as their likes and dislikes. 8 Table 36 Potential Mobility of Urban Families (Fint Method of MMiur«ment Ejrty 1955)t Attitudes Owners Renters Both Potentially mobile 25 % 55% 89% Expect to buy or may buy in % 13% 11% Expect to buy or may buy in 1956* No buying expectation but: Unsettled in borne and home unsatisfactory Unsettled in home and home satisfactory Settled in home and home unsatisfactory Settled and home satisfactory Pro-con; uncertain All cases 100% 100% 100% Number of cases The questions were: "Do you expect to buy or build a house for your own yearround use this year, 1955? How about next year, 1956? Do you feel that you have settled down to stay here in this house or do you feel you may not stay here very long? Would you say that your present home is satisfactory for your needs, or unsatisfactory or what?" t Data In this table are from the 1955 Survey of Consumer Finances. * The frequency of definite and conditional buying plans la always larger than that of annual purchases. That "second-year" plans are somewhat less frequent than "first-year" plans hag no predictive mem lug. In addition to determining the proportion of families who planned to buy a house or planned to move to another rented place within the next twelve months, the following question was asked: "If you were free to choose, would you like to stay here in this home (apartment) or would you like to move from this place?" Accord- 4 The rest of this chapter will deal with urban families, that Is, families living In towns and cities of at least 2D00 population and their suburbs. This urban population constitutes clobe to three-fourths of all American families and represents the sector most crucial for the housing market. s This study was Dart of a series of surveys conducted by the Survey Research Center with the help of a grant received from the Ford Foundation. 84

94 Attitudes Table 37 Potential Mobility of Urban Families (Second Mtthotf of Measurement) Owners June 1954 Renters Both October 1955 Both Owners and Renters Potentially mobile 34% 70% 48% 44% Expect to buy home within twelve months 4% 9% 6% 7% Might buy home within twelve months Expect to move within twelve months. but not to buy house Might move within twelve months (no buying- expectations) Would like to move (no buying or moving expectations) Would like to stay in home Pro-con, don't know, not ascertained All cases Number of cases 100% % 453 The questions were: "Do you expect to buy or.build a house for your own use during the next twelve months? Do you think you will be living in this house twelve months from now? If you were free to choose, would you like to stay here in this home (apartment) or would you like to move from this place?" * In October, 19S5, the question abont moving expectations within twelve months waa not asked. The omission of this question may explain the small difference in the proportion characterised as potentlaur mobue In 1854 and lflsb. 100% % 1411

95 ing to this method of measurement, presented in Table 37, the potential mobility of the American urban population appeared still larger than when the questions required statements of a critical nature such as "We feel unsettled" or "Our home is unsatisfactory". Potential mobility, as the term is used here, measures needs which may be satisfied either by buying or renting a more suitable dwelling. Can we attach any significance to answers obtained under unrealistic conditions as implied by the phrase 'If you were free to choose"? Let us first look at the reasons people gave for their desiring to move away from their current residence. It appears from a comparison of Table 38 with Table 35 that the distribution of these Table 38 Reasons Given by Urban Families for Desire to Change Residence (June I9S4) Reasons Home Owners Renters Move to different community 14% 9% Desired change in location or neighborhood Attraction of Bigger house 20 7 Better (newer, more modern) house Smaller house 10 2 Desire to own home 32 Other; not ascertained All cases 100% 100% Number of cases The question: "Why do you say so?" was asked of the 34% of home owners and the 70% of renters who said that they intended or would like to move from their current place of residence. Only the first reason given is tabulated here. reasons is quite similar to those given by actual purchasers or by those who had definite plans to buy houses. Again it is the desire for a bigger or better house and for a "nicer" neighborhood or suburban living which makes people say that they would not like to stay in their present homes. In addition, a substantial proportion of present renters expressed the desire to own a home. 8 As a further check on the degree of realism involved in our potential mobility concept, in Table 39 information is presented a The first category In Table 88, the proportion of people who would like to move to a different community, Is not included in Table 35. This category la smaller than the proportion which, according to past experience, will make such moves over the next few years. 86

96 about the kinds of people who have been classified as potentially mobile. It appears that differences by current place of residence are not pronounced among renters. Among home owners those who now live in smaller towns are less frequently potentially mobile than those who live in very large towns. Table 39 Potential Residential Mobility Among Different Groups of the Urban Population [June 1954) Percent Potentially Mobile Among: Home Owners Renters Place of Residence _ Central city with 1,000,000 and over Suburb of such city City 50,000 to 1,000, Town 2300 to 50, Family Income Under $ $ $ $7500 and over Age of Head Under and over Income Prospects* Better position and income expected No substantial change expected Worse position and income expected 82** 46** All The sue*hon was: "A iew years from now, would yon think yon and year family will have a better position and Income than yon have now,, or will yon be In about the same situation, or even in a less satisfactory situation?" ** Baaed on a small number of cases. Low-, middle-, and high-income groups do not differ substantially in the extent of their potential residential mobility. Lowincome people even tend to say, somewhat more often than other people, that they would like to stay in their present homes. Since it is hardly probable that low-income people want to stay because they are very satisfied with their present homes, we may conclude that people's expressed likings are not entirely fanciful but realitytested in many cases. 87

97 Table 39 also shows that potential mobility is a function of age. Among older people there are relatively many who say that they would like to stay in their present homes. The rate of potential mobility among younger home owners is surprisingly high. Younger people, more often than older people, expect to get ahead in life. This upward mobility is reflected in the last part of Table 39. People who say that they expect to have a better position and income in a few years than they have now are more frequendy potentially mobile than people who give the other frequent answer to the question, namely, that they do not expect any substantial change in their position and income. How is potential mobility related to past residential mobility? It appears from Table 40 that at present only 14 percent of urban families have lived twenty years or more in the same dwelling, Table 40 Relationship Between Past and Potential Residential Mobility of Urban Population * (June (954) Home Owners Renters Both Potentially Potentially Mobile Mobile Propor in Each Propor fn Each Propor Past Residential Mobility tion Group tion Group tion 20 yean or more in same dwelling 21%, *%] H% 10 to 19^4 years in 29% : 62% same dwelling 22 ) 12 \ 18 3 to 9^4 years in same dwelling Less than 2f4 years in same dwelling All cases 100% 34% 100% 70% 100% Number of cases The question was: "How long have you people been living in this house (apartment)?" See also Table 37. * Tha table Bhould be read as follows: among tbe 19% of home owners who were foand to live less than 2% years ha the same dwelling, 89% were classified as potentially mobile on the basis of the questions listed In Table 37. and only 32 percent ten years or more in the same dwelling. These oldtimers and the newcomers do not differ much from each other in occupation and income but, of course, they differ greatly in age. We find that newcomers are more frequently potentially mobile 88

98 than oldtimers. This appears to be the case partly because of their youth, and partly because of dissatisfaction with homes acquired in the earlier years of marriage. To some extent it is also due to upward mobility and rising aspirations of many people who have recently moved or acquired houses. The final table in this chapter (Table 41) indicates that potential residential mobility is also associated with past job mobility. People who have had the same job for many years less frequently Table 41 Relationship Between Job Mobility and Potential Residential Mobility of Urban Population - (Juif 1954) Home Owners Renters Both Potentially Potentially Mobile Mobile Propor in Each Propor in Each Propor Job Mobility* tion Group tion Group tion Same job for 20 yean or more 26%. 29% 12% 49% 20% Same job for 10 to 19i years Same job for less than 9U yean and 1 or 2 jobs since World War II and 3 or more jobs since World War Not ascertained All cases 100% 34% 100% 70% 100% Number of cases The questions -were: (If not self-employed) "About how long have you (head) been with the company or firm for which you work now?" (If self-employed) "About how long have you (head) had this business (profession)?" (If "less than 10 years" in reply to either question) "How many different full-time jobs have you (head) had since the war ended in i945?" See also Table 37. * Job mobility of heads of families 26 years of age or more. Retired and unemployed family heads are omitted. expressed desires to move from their current residence than did people whose job is relatively new or those who have held several jobs during the last few years. The findings in Table 41 again reflect an age effect which, however, does not seem to account for all the differences shown. 89

99 What is the significance of the findings presented? Obviously, the finding that a very substantial portion of the urban population would like to move to a dwelling with a better location or to a bigger or better home does not qualify as a measurement of future housing demand. First, many people will satisfy their desires by improving (modernizing, enlarging) their current homes. Secondly, the desires of many people will never be carried out because of lack of funds or disappointment with future income developments. Finally, of course, prospective developments in the capital market relating to mortgage interest rates and down-payment requirements represent crucial considerations which may forestall the translation of desires into demand. Nevertheless, there may be some value in the major finding of these inquiries which may be expressed by stating that the current as well as the prospective demand for houses has a strong underpinning in people's felt needs and desires. Present housing needs are so widespread the proportion of families characterized as potentially mobile is so large that housing demand would remain very high, or could rise, even if most of the currendy potentially mobile urban families could not afford to move. It is v also worth noting that the study does not indicate any diminution of the present trend toward suburban living or toward improvement in housing facilities. It appears that even substantial vacancies in old houses and apartments, located in undesirable neighborhoods, would not reduce greatly the demand for more suitable houses located in nicer neighborhoods. 90

100 6 An Experimental Index of Changes in Consumer Attitudes Need for Constructing an Index IN the preceding chapters a variety of indicators were presented measuring changes in consumer buying intentions as well as in consumer attitudes and expectations about their own and the country's economic situation. In view of our underlying theoretical scheme and the practical needs of most business cycle analysts, these data need to be supplemented by an overall measure of attitude change. In order to assess the progress, or the lack of progress, made through repeated attitudinal surveys, it is necessary to compare attitudinal measures with subsequent developments in the consumer sector of the economy. Some measures, notably automobile buying intentions, can be and have been tested individually. Other attitudes, for instance those relating to personal financial welfare, are hardly suitable for being compared separately with changes in consumer demand. Rather, they must first be combined into a composite index of consumer sentiment. Such a summary measure would not only simplify the use of attitudinal data for business analysts and economic forecasters; it also would be in some respects more meaningful and more reliable than replies to individual questions. In discussing the theoretical basis of our work we have postulated that we wish to measure those changes in consumer attitudes which exert a significant influence on inclinations to buy. A single question cannot possibly accomplish that purpose. This is the case in part because consumer buying inclinations may depend on a variety of attitudes, and in part because answers to single questions are subject to some measure of unreliability, depending upon personal circumstances, the mood of respondents as well as question wording. Attitudes toward personal financial welfare may or may not 91

101 conform with attitudes toward national economic conditions. Satisfaction with personal progress may promote buying inclinations in spite of pessimism about general economic trends; an optimistic general economic oudook. may or may not counterbalance the absence of personal progress. Hardly anything is known as yet about the dynamics of individual decision making in such instances of conflicting motivational forces. For the present, therefore, the temporary solution emerges to construct an index which takes attitudes toward personal financial welfare into account as well as people's general economic oudook, evaluations of market conditions, and buying intentions. The need for preparing a summary measure of changes in consumer attitudes became particularly clear when recendy calculations were published which compared changes in the answers to single attitudinal questions with aggregate durable goods sales. 1 This procedure assumes that each individual attitude, taken in isolation, must have a specific relation, unchanged over time, to consumer behavior. The unitary nature of psychological wholes composed of divergent parts, as well as the multiplicity of human motivations (some motives reinforcing one another and others conflicting with one another) are disregarded. As Gestalt theory has shown, a part or item may change its meaning and function according to the whole to which it belongs. With which nonsurvey measure of consumer activity should an index of consumer attitudes be compared? Some consumer money outlays are contractual (e.g., rent or payment of debt). Some others are primarily habitual (e.g., purchases of groceries). Psychological factors should be expected to exert their strongest influences on infrequent expenditures which can be postponed or made in advance of immediate needs. 3 Expenditures on automobiles and other durable goods are prominent examples of that type. Aggregate data on these expenditures are available on a quarterly basis and can be related to total consumer income. We therefore select the Commerce Department data on the rate of durable goods expenditures (durable goods expenditures as a percent of disposable personal income) as our external check. As mentioned before, we will on a later occasion report on the use of an alternative method of assessing the value of data on consumer attitudes. This alternative method consists of comparing the attitudinal measures with the subsequent behavior of the identical consumer units as determined through later interviews with the same respondents. For many purposes such an approach is unnecessarily complex and cumbersome. Economic research is 92 i No. It, Charts 6 to 11. a See No. 5, pp. 50 ff.

102 oriented toward developments in the economy rather than toward the fortunes of individual consumers. Our concern is restricted to variations which reinforce one another, while individual behavior may be influenced by numerous factors, peculiar to the individual, which do not vary in the aggregate. It may be assumed that such predispositions to buy as satisfaction with recent economic progress or optimism regarding the future belong in the first category, and personal factors (such as personality type, illness, or age) in the second category. Needless to say, it is not possible at this stage of our knowledge to construct a single measure of change in consumer sentiment which is satisfactory in every respect and can be assumed to be valid under all kinds of circumstances. Even a measure which is meant to be valid over relatively short periods only will have certain drawbacks and must be used with reservations. Some of the difficulties involved in the construction of an attitudinal index must therefore be discussed before we present our experimental solution of the problem. Tho Problem of Index Construction How can answers to attitudinal questions be quantified? The answers obtained to most of our attitudinal questions can be grouped in three categories: 1. Up or better or good irrespective of qualification or emphasis 2. Same or no change or uncertain 3. Down or worse or bad irrespective of qualification or emphasis. This ordering appears satisfactory except perhaps with respect to the. ''uncertain" answers, which according to some experiences seem to resemble the pessimistic replies in their effects. Pending future clarification of this relationship, the following formula was applied to each question used in the index: P v - P D The proportion of "down" responses (P D ) was deducted from the proportion of "up" responses (Pu); 100 was added to avoid negative values. This formula is identical with the assignment of a value of 2 to "up" responses, of 1 to "same" responses, and of 0 to "down" responses. The same formula has been used recently by Dun and Bradstreet in analyzing their survey of business expectations and also, for the same purpose, by the National Bureau of Economic Research. 8 a flee No. to, p. &4; No. 16, p

103 The index is designed to give representation to our four groups of consumer attitudes, and each group is, for the time being, represented by two questions. I. Personal financial attitudes 1. Better or worse off than a year ago (Table I) 2. Expect to be better or worse off a year from now (Table 4) II. Attitudes toward business conditions 1. Expected business conditions during next year (Table 8) 2. Expected business conditions during next five years (Table 10) III. Attitudes toward market conditions 1. Good or bad times to purchase household goods (Table 15) 2. Price expectations for next year (Table 18) IV. Buying intentions 1. Intentions to buy new cars during next twelve months (Table 24) 2. Intentions to purchase a house for owner occupancy during next twelve months (Table 33) Three questions in the index raise special problems buying intentions for houses "and automobiles (IV 1 and 2) and price expectations (III 2). Buying intentions may be expressed with some certainty ("We will, or probably will buy") or with indecision ("We may buy, or we may not"). If the proportion of people who are undecided always varied exactly as the proportion who are certain about their buying plans, the treatment of the undecided group would be of no consequence. Actually there are often some differences in movement, which may be due in part to inconsistencies in recording and coding borderline answers. It is not yet quite clear how these uncertain plans should be evaluated, and further study may indicate that different solutions should be adopted for different products. For the sake of uniformity of method within the index, buying intentions expressed with some certainty were assigned a value of 2, while those expressed with indecision were given a value of 1. People without plans received a score of 0. The time series thus obtained were then converted into an index (late 1952= 100).* Alternatively, the buying intentions Index might have been calculated (1) by using only plans which were expressed with some certainty, or (2) by giving equal weight to certain and uncertain plans. Our Intermediate solution of weighting oertain plans twice as heavily &B uncertain plans yields the same results as the other two methods for the 1953 and 1954 surveys. However, the drop In buying plans from October 1964 to Jane 1955 would be smaller than shown here, fx alternative (1) had been used: and larger If alternative (2) had been employed. The reader will note tbat in Chapter 4 on Automobile Demand, plans are broken down by degree of certainty and some use is made of alternative (2). 94

104 Regarding price expectations, the proportion expecting price stability and the proportion expecting a large increase or a small decline were classified as having given favorable replies (favorable to spending) and the proportion expecting small price increases was classified as having given unfavorable replies. This classification must be viewed as preliminary, pending the outcome of further studies (see also, p below). The major consideration in selecting the items listed above as components of the index was the availability of each item over the entire period If we had been satisfied with presenting the index over the later part of the period, it would have been possible to include some additional items. Particularly important among new series which may be added in the future are intentions to purchase large household goods (refrigerator, TV set, washing machine, and kitchen range) as well as intentions to make additions and large repairs on ones house. Comparable data on these items are available for October 1954, June 1955, and October The inclusion of these intentions would not have altered significantly the change registered by the index from October 1954 to October 1955 (although October 1955 would have been somewhat higher with household goods included than it is without these goods). The business conditions section of the index could have been made more complete for the years by adding two questions, one about the change in business conditions over the past year (Table 7), and one about expected changes in business conditions over the coming year (Table 9). As shown in Chapter 2, the first question shows a very sharp improvement in 1955, while the second question shows rather small variations. If the second section of our index had been constructed from the four questions, instead of only two, the index would have shown an even sharper rise in 1955: Attitudes toward June Oct. June Oct. Business Conditions Two questions* 85 91i/ V 109 Four questions See Table 43 below. Also, with the more complete coverage of attitudes toward business conditions the total index would have reached 113 in June 1955 (rather than 111) and 116 in October 1955 (rather than 112). The index has been constructed for six periodic surveys from November 1952 to October It was also calculated for early 1953 and early 1954 from data collected in the Surveys of Con- 95

105 sumer Finances, although a few figures had to be interpolated. The 1955 Survey of Consumer Finances did not contain a sufficient number of attitudinal questions to permit calculation of the index. Clusters and Weights of Components One of the attitudinal indicators used in this report consists of answers to the question whether the family is better or worse off financially than a year ago. Repeated studies have indicated that the answers may have different meanings according to whether the improvement (or deterioration) is viewed as permanent or temporary. 6 This suggests that the replies to this question may be properly used in conjunction with those to a second question in which people are asked whether a year from now they expect to be better or worse off. We may make use of two alternative methods: to calculate a separate index for each question and to average them, or to construct a joint measure from the two questions. The first method was used in the index. A joint measure can be calculated because past findings on the influence of temporary and permanent income changes justify the following three-way classification of respondents: 1. Improvement: "Better off' than a year ago and "expect to be better off" during the next year; or "better" in one year and "same" in the other year. 2. No change: "Same" in both years; or "better off' than a year ago and "expect to be worse off' during the next year, or the reverse. 3. Deterioration: "Worse off' than a year ago and "expect to be worse off" during the next year, or "worse" in one year and "same" in the other year. In Table 42 all respondents have been grouped according to these criteria for each of the periodic surveys. And for each survey an index has been calculated based on the formula "Improvement- Deterioration " The results of these calculations are then compared with the component of our index called Personal Financial Attitudes. The difference between the two methods of calculation appears to be quite small. There is no improvement from 1953 to 1954, but the change from 1954 to 1955 is substantial in both cases. In theory, the components of our attitudinal index should be weighted so that attitudes which are salient to respondents or which clearly express matters of major concern to them should carry the greatest weight. In practice, this goal is very difficult to achieve 96 5 See No. t, p. 368.

106 and requires intensive study over a prolonged period of time. As a temporary solution we have therefore attached, equal weights as of the base period (Nov.-Dec 1952) to each of our four groups of attitudes, and within each group to the two questions which compose it. Table 42 Personal Financial Attitudes SepL-Oct. June Oct. June Oct. Attitude* Improvement 33%»6% 34% 42% 40% No change Deterioration Don't know, NJV % 100% 100% 100% 100% Alternative Index 100** Standard Index* * * Aa derived from considering jointly the answers of each respondent to questions about past and expected changes In blafinancialwelfare. ' Average for Sept.-Oct = 100. * See Table 48, below; converted here to Sept.-Oct base. Two examples may illustrate the shortcomings of this solution. It may happen that at a certain time a single attitude, as revealed by one question, has an important influence on buying inclinations, while at another time it is of less importance. For instance, in 1951 most of those who said "This is a bad time to buy durable goods" expressed strong resentment against prevailing prices and recent price increases which were thought to be unjustified. In more recent years, however, when the majority of consumers thought that "This is a good time to buy," the importance attached to this attitude was perhaps smaller. A good example of an attitude whose meaning may vary from time to time and also from one group in the population to another (business owners and salaried employes) is price expectations. Differences have been observed in people's behavior in response to expected price increases, depending upon whether substantial or small price increases were expected. While the expectation of rapid price increases, prevalent in inflationary times, often leads to excessive buying and hoarding, the expectation of small price increases usually arouses some resistance to buying. Both past and 'expected price increases are viewed by most consumers as adverse factors because they make their incomes go less far. Contrariwise, past as well as expected price declines are commonly viewed as favorable, although in the fall of 1953 some people argued that it 97

107 was "a bad time to buy" because prices may be lower later on. Favorable reactions to stable prices both past and expected price stability appear to be quite universal. 6 It follows from these examples that an attitudinal index, made up in each period of the same components to which the same weights are attached, cannot be viewed as a mechanical instrument to be used in unchanged form under different circumstances. We may hope, however, that the effects of changes in salience and meaning are minimized if the index is based on a substantial number of components. A further problem is that of scaling individual attitudes. There is some evidence that, as they stand, certain attudinal series fluctuate within a narrow range, while others have fluctuations of considerable amplitude. Of course, the series which fluctuate widely exert the greatest influence on the movements of the index. This result would not necessarily be undesirable, if we could be sure that series with large fluctuations are particularly sensitive indicators of consumer sentiment. However, it may be true that amplitude of fluctuation is determined to some extent by the wording of questions; and to that extent a correction is needed. Such a correction might take the form of attaching a smaller weight to the series which display particularly wide movements or by adding a larger constant- (say, 200 instead of 100 in the formula P n P D ). No adjustment of this kind is feasible yet, since it would require a much longer period of experience with the same-questions than is available so far. This is one of the reasons why the attitudinal index is more properly viewed as an indicator of the direction of change in consumer inclinations to buy than of the extent of change. In conclusion, it hardly needs to be said that the Index of Consumer Attitudes, as presented in the next section, is experimental and subject to revision. Future research may produce improved solutions by enabling the investigators to attach different weights to individual questions or to give more precise scale values to the answers. In this first attempt to construct an index such complex methods could not be used, and equal weighting of all questions appeared to be the least arbitrary solution. It should be added that we did not attempt to adjust for seasonal variations in spite of the fact that the Commerce Department estimates of durable goods sales are seasonally adjusted. That price expectation! may have different effects at different times baa been pointed out previously In No. 8, pp There the authors also called attention to onr other point, namely, that a given attitude may be more influential In one year than lh another. 98

108 What the Index Shows The movements of the index and o its components, from the end of 1952 to October, 1955, are presented in a series of tables and charts. As shown in Chart 4 and Table 43, the index dropped substantially between the beginning of 1953 and October By that time numerous business indicators revealed that economic activity had slowed down. Since no survey was conducted in the spring or summer of 1953, it is not known whether consumer attitudes would have given an advance indication of the recession. Chart 4 indicates, however, that during the subsequent upswing in business activity consumer attitudes led consumer demand, and especially the rise in sales of consumer durable goods in the winter of The June 1954 survey already revealed a marked advance in the index, based primarily on more favorable judgments of market conditions and a sharp upturn in buying plans for houses and automobiles. A further substantial rise in the index occurred between June 1954 and June The four major components of the index did not always move together. Some erratic fluctuations occurred not only in data derived from individual questions, but also in the subgroups composed of two questions each. These fluctuations converge into a smooth line when the four subgroups are combined. A glance at Chart 5 reveals that the index line for the upper income groups falls below that for the lower income groups (see also Table 44). Upper income families were somewhat more sensitive to the impact of the recession; in 1954 and 1955 the attitudes of all groups improved greatly, but the improvement was more pronounced for low- than for high-income people. Chart 5 compares changes in attitudes of different income groups, starting with a common base (late 1952 = 100), rather than their absolute value. It obscures an important finding of many past surveys that upper income people are more optimistic and confident than the less weil-to-do. T This was still true in late 1955, as is illustrated by Chart 6. In this Chart the same index lines appear as in Chart 5. But for each income group the starting point is determined direcdy by the formula P D P D -f- 100 without converting each series to a common base. Using this method, the upper-income group which has the highest percentage of optimistic attitudes (Pn) and a relatively low percentage of pessimists (P D ) has a higher starting point than the other two income groups. What happened during the last two years is that the gap between the attitudes of the three major 7 See Appendix Tables A1-A7. 99

109 Nov.-Dcc. Sectors 1952 Table 43 Consumer Attitudes Index end its Components, Jan.-Feb Sept.-Oct For All Families Jan.-Feb Personal financial attitudes ^ »* Attitudes toward business conditions » 82 85* 85 91* 106^ 109 Attitudes toward market conditions Vi W * Buying intentions loof V* 105* 11S Index Not available estimated to be. equal to Nov.-Dec., t Not available estimated to be equal to Jan.-Feb., June 1954 Oct June 1955 Oct. 1955

110 (LATE 1952=100) 1201 Consumer Attitudes and Durable Goods Sates* It! I05H Index of Durable Goods Sales as % of Income A- lod HOr- 95r- Index of Consumer Attitudes i i r i i i i i t i i i i i i i i i i i i i i i i i i i i i i i i i i i * The index of consumer attitudes is compared with seasonally adjusted data on sales of consumer durable goods as a percent of disposable income (U. S. Dept. of Commerce). Fourth quarter 1952 = 100.

111 ' ' i i i i i t i i i i i I I 1 IOKO IQKX IQKA I O U INDEX 130 CHART 5 Index of Consumer Attitudes, 1952 = 100 (All people and thro* major Income groupi) / Income Under 3000 / 110 V ^ t All People /»** Mr come * ^ / / A Income *50O0 and Over 70

112 Table 44 Consumer Attitudes Index end its Components, For Three Major Income Groups FAMILIES WITH INCOMES UNDER $3000 Nov.-Dec. Jan.-Feb. Sept.-Oct. Jan.-Feb. June Oct. June Oct Personal financial altitudes fc Attitudes toward business conditions * V* i/* 116V* Attitudes toward market conditions V* V* Buying intentions ioot v* 142 Index S FAMILIES WITH INCOMES OF $ Personal financial attitudes 100 m* 106V* V* 117V* Attitudes toward business conditions * 80 81V* v* 105 Attitudes toward market conditions v* 105V* 114V* V* Buying intentions loof V* Index FAMILIES WITH INCOMES OF $5000 OR OVER Persona] financial attitudes W V* 94V* v* 102 Attitudes toward business conditions * v* 92V* * Attitudes toward market conditions V* 101 v* 103 V* 115L* Vi Buying intentions ioot Index Not available estimated to be equal to Nov.-Dec., 1952 t Not available estimated to be equal to Jan.-Feb., 1953.

113 tsrwym^ INDEX IN LATE A?F^T CHART 6 Comparison of Attitude Changes among Three Major Income Groups* I40t- lncome*5000 end Owf Income * / All People I20> Income Under The indexes presented are identical to those in Chart 5, except that the starting point of each line is the absolute value of the index in Nov.-Dec, I9S2 rather than 100.

114 income groups became narrower. The upper income index remained on a higher level during the entire period, although the difference between the lines diminished. Should the three income groups be treated equally, or should the attitudes of one or the other group be given greater weight? One may argue that upper income families purchase the larger part of consumer durable goods; therefore an index of their attitudes should correspond most closely with total expenditures on durables. Alternately, however, it may be true that attitudes and their changes are of lesser significance for the well-to-do than for those in the middle and lower income brackets. Those with abundant means may purchase even if they are pessimistic and may be influenced to a lesser degree by changed attitudes. Investigations intended to clarify these problems are under way but have not yet been completed. Pending further information we have compared in Chart 4 the overall index, computed for all income groups, with sales of durable consumer goods. As shown in Chart 4, the latest survey (October 1955) gives no indication that consumer inclinations to buy will undergo any significant change in early Consumer confidence and expectations, after having improved gready from early 1954 to June 1955, remained favorable during the following few months without showing any further substantial gains. We shall discuss the probable meaning of this stability in Chapter 7- Having begun this chapter by arguing that single attitudinal indicators need to be supplemented by an index of consumer attitudes, we must close by calling attention to the other side of the argument. The index of attitudes alone does not suffice; in order to understand the changes in consumer sentiment and the reasons for these changes, the index must be used in conjunction with the variety of data on specific attitudes and the reasons which underlie them presented in the preceding chapters. 105

115 7 The Consumer Sector and the Business Cycle IN the President's last Economic Report to the Congress the statement appears that "the future course of consumer spending is always shrouded in uncertainty." 1 No doubt, the future is always uncertain. But the Economic Report appears to have implied something much more specific than such a broad generalization. In discussing business investments and government spending, for example, the Report calls attention to the most likely developments and does not stress the uncertainty of the oudook. Why should consumer spending be singled out as one of the most uncertain factors in attempts to clarify the prospects of the economy? This monograph tries to show how the uncertainty regarding future consumer spending can be reduced. Before summarizing what we have learned in this respect, a few words need to be said about the role of consumers in shaping business fluctuations under current conditions. A table included in the President's Economic Report provides a partial answer to this problem (Table 45). The eighteen months prior to the issue of the Report are divided there into two equal periods. The first may be identified as the recovery, that is, the phase in which the upswing began; the second represents expansion, the phase of substantial further gains in production, employment and incomes. The question raised and answered in the table is: To which type of economic activities can the gains in total sales be attributed during each of the two phases? Two kinds of economic activities are of little interest to us: consumer expenditures for services and for nondurables. Consumer expenditures for services appear to have undergone a structural increase over a fairly extensive period. Consumer expenditures for l Economic Report oj the President, transmitted to the Coo grew, January 24, 1856, p

116 non-durables appear to have followed consumer incomes which advanced much more during the second than during the first phase. We focus our attention on consumer durables and residential construction. These are the two volatile elements of consumer decision-making in which consumer autonomy may express itself. 2 A Table 45 Contributions to Growth in Final Purchases, 1954-^S 1 Second quarter First quarter 1954 to first 1955 to fourth Item quarter 1955 quarter 1955 a Billions of dollars* Total change In final purchases Percent of growth accounted for by: Percent Consumer expenditures Durable goods 40 3 Nondurable goods Services Residential construction 23 5 Fixed business investment* 1 28 Note: Percents will not necessarily add to 100 since the percent contributions o net foreign investment and government purchases of goods and services are not shown. Source: Department of Commerce (except as noted). i Gross national product less change In business Inventories. i Preliminary; fourth quarter estimates by Council of Economic Advisers. Seasonally adjusted annual rates. «Producers' durable equipment and construction other than residential. This table and footnotes have been reproduced from page 107 of the Economic Report of the President, January glance at the table reveals that this is where the recovery of 1954 began. These are the two areas in which consumer willingness to purchase led to increased borrowing in 1954 and These two areas together accounted for over 60 percent of the gains during the recovery, but for less than 10 percent during the subsequent expansion phase. Fixed business investment, on the other hand, did not contribute to, the upswing in the first phase but showed substantial gains in the second. Should the indications presented 3 Strictly speaking, the statement In the text would be correct only If Instead of residential construction the table contained data on consumer expenditures for one-family bouses; these constitute, however, the largest part of residential construction. 107

117 by the Commerce Department and McGraw-Hill investment surveys conducted in the winter of 1955 prove correct and should business investment advance substantially during 1956, it would appear even more clearly that large gains in business investment followed increases in business sales rather than anticipating them. In the past, business and government have often been viewed as the two areas in the economy where changes in economic activity are bound to originate. True, it was recognized that some changes in business investment may occur in consequence of changes in consumer spending; but stress was placed on the autonomous nature of many business capital expenditures. By contrast, consumption was commonly regarded as being nonautonomous. Alvin Hansen defines the term autonomous as follows: "Autonomous investment means investment unrelated to income changes or income levels. Similarly, autonomously-caused changes in consumption relate not to income changes, but to changed attitudes of consumers." 3 In the light of the data reproduced from the Economic Report and our findings about the improvement of consumer attitudes as early as June 1954, it appears that in-1954 consumer spending was autonomous and business investment was not. Needless to say, broad generalizations are not warranted on the basis of a single experience. We know both from traditional business cycle studies and from consumer attitude surveys that the sequence of events was different during the downturns of 1948 and The initial impetus for a curtailment of economic activity did not come from the consumer sector in those years. Consumers, on the other hand, played an important role in counteracting forces which might have tended to deepen and prolong those recessions. In 1950, and especially in the second half of that year after the outbreak of the Korean war, both the business and consumer sectors expanded their purchases. That inflation was arrested in 1951 may be attributed primarily to consumers; changes in their attitudes and expectations led to a downturn in their purchases. It follows then, that both consumer spending and business spending may exhibit autonomous as well as nonautonomous movements. This is particularly true in an economy in which consumers, having substantial liquid reserves and easy access to credit devote a sizable proportion of their resources to making postponable purchases on durable goods and the like. A major conclusion of this study concerns the influence of consumer attitudes and expectations on peacetime economic fluctuations. Recently Bert G. Hickman, after analyzing the trends of consumer incomes and expenditures during the Korean war, found that the widely accepted "hypothesis that consumer expenditures 108 a No. 18, p. 424.

118 axe primarily a (unction of real income" was contradicted in Without making full use of survey data on changes in consumer attitudes (see No. 7), he concluded that "psychological variables may for a time assume positions of equal or greater importance as determinants of consumer expenditures than real income." Following this statement, Hickman expressed reservations:... However, it is important to remember that this instability was the result of generalized changes in expectations that were induced by dramatic military developments, and in no way demonstrates that peacetime cycles are regularly influenced by shifts in consumer expectations. Whether that is the case is a question that can only be answered by further investigation (No. 21, p. 5). Analysis of the recovery in 1954 indicates that the so-called "instability of consumer spending", that is, the absence of close correspondence between changes of consumer spending and those of consumer income, is not restricted to times of war. In the light of our data, it appears that this instability is not something capricious, unexplainable and unpredictable, but is the function of welldetermined and observable changes in consumer perceptions and attitudes. In 1954, our studies suggest, the country experienced a recovery due to the desire of consumers to upgrade their stock of durable goods and their living accommodations. For the past ten years consumers have been basically optimistic. They have striven for improvements in their standard of living and their success in these endeavors has induced them to raise their sights further. Some caution and hesitation was caused by the recession of 1953, of which a rather substantial proportion of the American people were aware, but by which relatively few people were actually hurt. The large majority of people who did not feel personally the effects of the recession soon discounted the dire predictions and reacted with a fresh outburst of optimism. Price stability and the opportunity to make "good buys" helped to transform desires for better durable goods and better housing into effective demand. To be sure, such enabling conditions as high incomes, easy access to credit, and fair amounts of liquid reserves must also be taken into account. Yet changes in attitudes were the spark which led consumers to make use of their own as well as of other people's money to upgrade their possessions. Can consumer attitudes change independently of recent changes in people's financial situation? The record of 1954 indicates that consumer attitudes may change autonomously in response to a multiplicity of stimuli in the economic and political environment. In 1954 consumer attitudes showed decisive improvement before personal incomes and employment had recovered from 109

119 the recession. There have been other times, however, when changes in attitudes have conformed with recent trends in income and business activity. Thus, in the summer of 1955 the momentum generated earlier appeared to persist People felt that they were better'off and that times were good, and these opinions made them expect further gains. The crucial problem then, as stated at the outset of this study, is to determine whether or not consumer sentiment indicates a change or a turning point in consumer demand. We are not in a position yet to offer an answer to the basic question regarding the conditions under which autonomous changes in consumer attitudes occur. The origin of changes in consumer attitudes is still shrouded in uncertainty. But consumers are accessible; their attitudes and expectations can be measured; and there is reason to view these attitudes as advance indications of consumer action. Therefore, consumer demand need not remain a particularly uncertain or unpredictable element in the economic outlook. What then does the last survey reported here (October 1955) tell us about the consumer outlook? That survey provided no indications that consumer inclinations to buy would undergo a substantial change during the following few months. The findings of the October 1955 survey differed from those of the June 1955 survey in that the June survey registered an improvement in consumer attitudes while the October survey showed no further change. When such economic indicators as the index of industrial production or of retail sales fail to register some growth over an extended period, economists have learned to regard this as a danger signal, even if the level of these indicators is high. We do not yet know whether lack of growth in optimism should also be viewed as a danger signal. There are no clear reasons why it should. In fact, as mentioned before, since general business conditions had shown some further improvement from June to October, one might argue that the answer "During the next twelve months there will be no change in our situation" had a more favorable connotation in October than in June. Therefore, the conclusion drawn from the October survey, as first published in November 1955, read: "While it appears that the current high rate of consumer spending will continue, the consumer sector cannot be counted upon to provide further impetus to the economy." * In addition to this general conclusion, it is worth while to recapitulate briefly the specific danger signals which were apparent in the fall of First, we may recall that our index of consumer attitudes as prepared for upper income people (Table 44) showed no * See also No. t, January 1056, p. 1.

120 a downturn from June to October. Even though the decline was small and was brought about by several changes which by themselves were not statistically significant, this change in direction should not be overlooked. Secondly, we must refer to the finding that consumer intentions to buy automobiles were decidedly lower in October 1955 than in October 1954 (Table 24). In view of the importance of the automobile industry for the American economy, this finding must be emphasized. Thirdly, the change in price expectations must be noted. The proportion of people who expected prices to go up rose in June, and the October survey indicated that this change was not a temporary phenomenon. Since to some extent consumer willingness to spend during is attributable to people's satisfaction with price stability, this change in expectations in 1955 must be viewed as a danger signal. We are on more doubtful grounds when we try to evaluate the findings that some people viewed their short-term debt as a hardship in the.fall of 1955 (p. 39) and that some people thought of the President's illness and the forthcoming elections as unfavorable developments which may affect the country's business situation adversely (p. 25). All this leaves us with a multitude of question marks regarding mid-1956 and the second half of the year. How can. the uncertainty about the future of consumer spending be dispelled? Through new surveys frequently measuring changes in consumer attitudes and expectations. Through constant improvement of methods now used and-the development of new ones. Through continuous testing of data on consumer sentiment. Ill

121 Appendix A Differences in Attitudes among Income, Occupation, and Age Groups MOST of the tables presented in this monograph contain data on the trend of attitudes for the entire cross-section of American consumers. Differences in the attitudes of groups of consumers with varying economic and demographic characteristics are presented - in this Appendix. It contains, first, seven tables (A1-A7) which show how high-, middle-, and low-income people differed in their answers to seven key attitudinal questions. Table A8 compares the income distributions obtained in the six periodic surveys made between the fall of 1952 and October This table shows that the proportion of upper income families (families whose head had an annual income of $5000 or more before taxes) increased slightly from 1953 to Tables A9-A11 show the trends of three attitudinal questions by major occupation groups, and Tables A12-A14 illustrate the relationship between attitudes and age. The income breakdowns provide detailed evidence for two findings discussed in Chapter 6. First, they illustrate the relative optimism of the upper income group and pessimism of the lower income group. Price expectations are one of the few economic attitudes where the upper and lower income groups do not differ. Second, they show that during the period under study attitudes toward business conditions and opinions of market conditions improved more among low-income people than among the upper income groups. No consistent differences among income groups appear in the trends of personal financial attitudes. Since occupations differ with respect to income level, it is not surprising to find that people in low-income occupations particularly laborers, service workers, and farmers are throughout less optimistic than people in occupations characterized by higher incomes. Nor is it surprising, considering the failure of the farm 112

122 Table Al Consumers' Evaluations of Their Financial Situation as Compared with a Year Earlier, by Three Major Income Groups Evaluation of Nov.-Dec. Sept.-Oct. June Oct. June Oct. financial situation A. FAMILY INCOME UNDER $3000' Better off 18% 18% 19% 16% 22% 20% Same Worse off Uncertain Not ascertained 1 * * * AJ1 cases ioo% 100% 100% 100% 100% 100% Number of cases B. FAMILY INCOME $3000-$4999, Better off 50% 27% 32% 29% 35% 37% Same Worse off Uncertain Not ascertained * * * * * All cases 100% 100% 100% 100% 100% 100% Number of cases C. FAMILY INCOME $5000 OR OVER Better off 40% 35% 35% 46% 45% 49% Same 46 « Worse off IS Uncertain * * 1 Not ascertained 1 * * * 1 All cases 100% 100% 100% 100% 100% 100% Number of cases For question and distribution of all families: See Table!. * Less tban one-half of one percent- 113

123 Table A2 Consumers' Expectations Regarding Their Financial Situation a Year Hence, by Three Major Income Groups Expected change in Sept.-Oct. June Oct. June Oct. financial situation A. FAMILY INCOME UNDER $3000 Better off 20% 20% 20% 25% 23% Same Worse off Uncertain Not ascertained 1 1 I 1 2 All cases 100% 100% 100% 100% 100% Number of cases B. FAMILY INCOME $3000-$4999 Better off 33% 37% 30% 39% 40% Same Worse off Uncertain Not ascertained 1 * * 1 t All cases 100% 100% 100% 100% 100% Number of cases C. FAMILY INCOME $5000 OR OVER Better off 40% 37% 43% 46% 42% Same 36 ' Worse off Uncertain Not ascertained * * * * * All cases 100% 100% 100% 100% 100% Number of cases For question and distribution of all families: See Table 4. Lens than one-half of one percent. 114

124 Table A3 People's Evaluations of Business Conditions as Compared with a Year Earlier, by Three Major Income Groups June Oct. June Oct. Current conditions are A. FAMILY INCOME UNDER $3000 Better 15% 16% 37% '39% About the same Worse Not ascertained All cases 100% 100% 100% 100% Number of cases B. FAMILY INCOME $ Better 17% 19% 50%. 47% About the same S Worse Not ascertained All cases 100% 100% 100% 100% Number of cases B. FAMILY INCOME $5000 OR OVER Better 20% 26% 56% 58% About the same Worse Not ascertained All cases 100% 100% 100% 100% Number of cases For question and distribution of all families: See Table

125 Table A4 Business Conditions Expected over the Coming Year, by Three Major. Income Groups Business conditions Nov.- Sept.- expected over the Dec Oct. June Oct. June Oct. coming year A. FAMILY INCOME UNDER $3000 Good times 42% 36% 39% 54% 61% 59% Good in some ways, bad in others Bad times Uncertain Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases B. FAMILY INCOME $5000-$4999 Good times 60% 52% 48% 62% 75% 73% Good in some ways, bad in others A Bad times Uncertain Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of. cases C. FAMILY INCOME $5000 OR OVER Good times 70% 55% 68% 66% 82% 82% Good In some ways/ bad in others Bad times Uncertain Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases For question end distribution of ell families: See Table

126 Table A5 Business Conditions Expected over the Next Five Years, by Three Major Income Groups Business conditions Nov- Sept.- expected next Dec. Oct. June Oct. June Oct. five years A. FAMILY INCOKI UNDER. $3000 Good times will predominate 22% 17% 20% 23% 31% 35% Some unemployment and depression Bad times will predominate Depends on cold war, government policy, etc Don't know; nobody can tell Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases B- FAMILY INCOME $3000-$4999 Good times will predominate 38% 28% 26% 27% 40% 44% Some unemployment and depression Bad times will predominate Depends on cold war, government policy, etc Don't luww; nobody can tell li Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases ' 321 C. FAMILY INCOME $5000 OX OVKI Good times will predominate 49% 38% 36% 43% 52% 50% Some unemployment and depression Bad times will predominate Depends on cold war, government policy, etc Don't know; nobody can tell Not ascertained 7 * All cases 100% 100% 100% 100% 100% 100% Number of cases For question and distribution of all families: See table 10. * Less than one-half of one percent

127 Table A6 Opinions of Buying Conditions for Large Household Goods, by Three Major Income Groups Nov.- Sept.- Dec. Oct. June Oct. June Oct. Opinions A. FAMILY INCOME UNDER $3000 Good, or very good time to buy 20% 30% 30% 37% 41% 45% Good time in some ways, but not in others; it depends Bad, or very bad, time to buy Don't know Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases S B. FAMILY INCOME $3O00-$4999 Good, or very good time to buy 25% 36% 42% 52% 57% 57% Good time in some ways, but not in others; it depends Bad, or very bad, time to buy Don't know Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases 383 S3I C. FAMILY INCOME $5000 OR OVER Good, or very good time to buy 37% 41% 57% 59% 68% 61% Good time in some ways, but not in others; it depends Bad, or very bad, time to buy Don't know Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases For question and distribution of all families: See Table

128 Table A7 Price Changes in Household Goods and Clothing Expected over Next Year, by Three Major Income Groups Nov.- Sept.- Dec. Oct. June Oct. June Oct. Expected change in price A. FAMILY INCOME UNDER $3000 Will rise 6% 16% 13% 14% 23% 30% No change expected; or some rise, some fall Will fall Uncertain, depends Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases B. FAMILY INCOME $300O-$4999 Will rise 6% 14% H% 14% 24%.33% No change expected; or some rise, some fall Will fall Uncertain, depends Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases C. FAMILY INCOME $5000. OR OVER Will rise 7% 13% 9%»% 28% 34% No change expected; or some rise, some fall Will fall Uncertain, depends Not ascertained I * 2 1 * 1 All cases 100% 100% 100% 100% 100% 100% Number of cases For question and distribution of alt families: See Table 18 * Less than one-half of one percent. 119

129 Table A8 Family Income Distributions Family Income* S100O or less $ $ $300O-S999 $ $ $ $10,000 and over Not ascertained All cases Nov.- Dec 1952 Sept.- Oct June 1954 Oct June 1955 Oct % 9.3% 7.8% 8-4% 6.3% 7.5% U %\s % 100.0% 100.0% 100.0% 100.0% 100.0% Family Income before taxea. 120

130 i Table A9 Consumers' Evaluations of Their Financial Situation as Compared with a Year Earlier, by Major Occupation Groups Nov.- Sept.- Evaluations of Dec. Oct. June Oct. June Oct. financial situation A. PROFESSIONAL AND TECHNICAL WORKERS Better off 99% 39% 44% 58% 47% 54% Same Worse off Uncertain 5. 1 Not ascertained 1 Al] cases 100% 100% 100% 100% 100% 100% Number of cases B. SELF-EMPLOYED BUSINESSMEN AND MANAGERIAL PERSONNEL Better off 35% 31% 37% 33% 34% 34% Same Worse off Uncertain *. 2 Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases C CLERICAL AND SALES PERSONNEL Better off 37% 30% 38% 40% 43% 40% Same Worse off Uncertain Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases

131 Table A9 (continued) Nov.- Sept.- Evaluations of. Dec. Oct. June Oct. June Oct. financial situation D. SKILLED AND SEMI-SKILLED WORKER. Better off 28% 31% 36% 34% 44% 45% Same Worse off ' Uncertain I Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases E. LABORERS AND SERVICE WORKERS Better off 25%- 19% 24% 24% 31% 38% Same Worse off Uncertain Not ascertained 1 _ 1 All cases 100% 100% 100% 100% 100%. 100% Number of cases F. FARMERS Better off 32% 28% 21% 27% 22% 20% Same Worse off Uncertain Not ascertained 1 All cases 100% 100% 100% 100% 100%. 100% Number of cases 113 " For question and distribution of all families: See Table I. * Leaa than one-half of one percent. 122

132 Table A10 Consumers' Expectations Regarding their Financial Situation a Year Hence, by Major Occupation Groups Expected change in Sept.-Oct. June Oct. June Oct. financial situation A. PROFESSIONAL AND TECHNICAL WORKERS Better off 48% 32% 51% 61% 46% Same Worse off Uncertain Not ascertained 1 1 All cases 100% 100% 100% 100% 100% Number of cases B. SELF-EMPLOYED BUSINESSMEN AND MANAGERIAL PERSONNEL Better off 40% 38% 38% 46% 38% Same Worse off Uncertain Not ascertained All cases 100% 100% 100% 100% 100% Number of cases c CLERICAL AND SAXES PERSONNEL Better off 43% 41% 37% 44% 42% Same Worse off Uncertain Not ascertained 1 All cases 100% 100% 100% 100% 100% Number of cases

133 Table A10 (continued) Expected change in Sept.-OcL June Oct. June Oct. financial situation D. SKILLED AND SEMI-SKILLED WORKERS Better off 31% 55% 36% 41% 41% Same Worse off Uncertain Not ascertained 1 1 All cases 100% 100% 100% 100% 100% Number of cases E. LABORERS AND SERVICE WORKERS Better off 23% 30% 28% 30% 38% Same Worse off Uncertain Not ascertained All cases 100% 100% 100% 100% 100% Number of cases 131 ISO F. FARMERS Better off 35% 21% 17% 32% 25% Same Wone off Uncertain Not ascertained All cases 100% 100% 100% 100% 100% Number of cases For question and distribution of all families: See Table

134 Table All Business Conditions Expected Over the Coming Year, by Major Occupation Groups Business conditions Nov.- Sept.- expected over the Dec. Oct. June Oct. June Oct. coming year A. PROFESSIONAL AND TECHNICAL WORKERS Good times 70% 68% 66% 77% 83% 80% Good in some ways, bad in others Bad times Uncertain Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases B. SELF-EMPLOYED BUSINESSMEN AND MANAGERIAL PERSONNEL Good times 73% 61% 65% 71% 79% 75% Good in some ways, bad in others e 6 Bad. Limes Uncertain Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases C. CLERICAL AND SALES PERSONNEL Good times 63% 58% 64% 75% 79% 78% Good in some ways, bad in others _ 6 4 Bad times Uncertain Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases

135 Table ATI (continued) Business conditions Nov.- Sept.- expected over the Dec Oct. June Oct. June Oct. coming year D. SKILLED AND SEMI-SKILLED WORKERS Good timet 56% 46% 50%. 57% 76% 74% Good in some ways, bad in others Bad times Uncertain IS Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases E. LABORERS AND SERVICE WORKERS Good times 43% 38% 39% 55% 62% 70% Good in some ways. bad in others IS Bad times Uncertain Not ascertained All cases 100% 100% 100% 100% 100% 100% Number of cases F. FARMERS Good times 48% 49% 43% 59% 62% 46% Good in some ways, bad In others Bad times Uncertain Not ascertained ' All cases 100% 100% 100% 100% 100% 100% Number of cases For question and distribution of all families: See.Table

136 Table A12 Consumers' Evaluations of Their Financial Situation as Compared with a Year Earlier, by Age Groupsf Evaluations of AGE financial situation Under ' 65 and Over Better off 51% 35% 26% 24% 14% Same Worse off Uncertain 2 I Not ascertained * 1 * 1 I All cases 100% 100% 100% 100% 100% Number oe cabes For question and distribution of all families: See Table 1. * Less than one-half of one percent f.figures are average* of results obtained from studies made In June, 1984 and Jane, I960. Table Al 3 Consumers' Expectations Regarding Their Financial Situation a Year Hence, by Age Groupsf Expected change in ACK financial situation Under and Over Better off 55% 40% 30% 24% 8% Same Worse off Uncertain Not ascertained All cases 100% 100% 100% 100% 100% Number of cases For question and distribution of all families: See Table 4. t Figures are averages of remits obtained from Btodies made In June, 1054 and June,

137 Table A14 Business Conditions Expected over the Coming Year, by Age Groupsf Business conditions expected over the AGE coming year Under and Over Good times 66% 65% 60% 58% 53% Good in some ways, bad in others Bad times Uncertain Not ascertained ALT cases 100% 100% 100% 100% 100% Number of cases For question and distribution of all families: See Table 8. t Figures are averages of results obtained from studies made In June, 1954 and June, sector to share in the economic upswing, that farmers were more pessimistic in October 1955 than during the recession two years earlier. More striking is the finding that the greatest improvement in attitudes toward personal finances as well as in general economic outlook, occurred in the so-called working class among skilled and semi-skilled workers, laborers, and service workers. Age groups usually show few differences in the rate or direction of change in economic attitudes in the short run. Tables A12-A14 therefore do not present trends in attitudes by age groups, but show simply the relationship between economic attitudes and age, using an average obtained from two surveys. The purpose of these tables is to illustrate the association of optimism with youth and pessimism with advancing age in present-day America. This association is very strong for personal financial attitudes, reflecting the more rapid economic advance which tends to occur in the early stages of working life. It is much less pronounced for business cycle expectations. 128

138 Appendix B Methods of the Periodic Surveys The Sample THE periodic surveys analyzed in this monograph are designed to measure changes in those attitudes o consumers which relate to willingness to buy. Since the purpose of these measurements is to explain variations in discretionary consumer purchases in the American economy, it is essential that a representative cross-section of American consumers be interviewed in each survey. The Survey Research Center uses probability sampling to select representative cross-sections of the population. More precisely, the method employed is known as multi-stage area sampling. This method has been described in detail elsewhere. 1 - It suffices here to discuss some of the decisions which had to be made in selecting the sample for the periodic surveys. The first decision concerns the geographic spread of the sample. For each of the two 1955 surveys, 66 primary sampling units were selected (usually counties or groups of counties), including 12 of the largest metropolitan areas and 54 other sampling units selected by probability methods from all the nonmetropolitan counties in the country. In the earlier surveys where the sample was smaller, fewer primary sampling areas were used: 44 in 1954 (including 8 large metropolitan areas) and 34 in 1953 (including 7 large metropolitan areas). Within the selected primary sampling areas cities, towns, or open country segments were selected, then city blocks, and finally dwelling units always by a process of random choice. This method of sampling differs from simple random sampling in that it concentrates interviews in a relatively small number of counties, in a limited number of areas within the county, and in a small number of blocks and segments within these areas. This concentration of interviews is known as clustering. I'SM No. Ik, PP ; No. 10\ and No. 19, pp , 129

139 The sample thus selected consists of private dwelling units in the continental United States. It does not include military posts, institutions, hotels and large rooming houses. Hence the institutional population, transients, and most military personnel are not represented in the sample. The interviewers are given no latitude in selecting addresses. They must try to obtain an interview at each of the selected dwelling units, and no substitutions are permitted. A second decision concerns sample size. The sample of the Sept.-Oct survey consisted of 1023 cases; 1365 people were interviewed in June 1954, 1139 in October In each of the 1955 surveys it was possible to expand the sample to slightly over 2000 cases. A third decision concerns the choice of consumer unit and of the respondent to be interviewed. After a representative sample of dwelling units has been selected, the interviewer is instructed to take one interview with each family in the dwelling unit. A family is defined to include all people related by blood, marriage, or adoption who live in the same dwelling unit at the time of the interview. A family may consist of a single person. More than one family may live in a dwelling unit (roomers and boarders, for instance). Families are selected as the basic consumer unit because of the major emphasis of the periodic surveys on purchases of consumer durable goods (or more specifically, on the relation of attitudes to such purchases). Large household goods such as kitchen ranges, or refrigerators are almost always shared by related individuals living together. Similarly, automobiles are often pooled as the expression "family car" indicates. And even if a family containing several related adults owns two cars, there may be substitution of cars, and it makes sense to speak of a "two-car family." In the Surveys of Consumer Finances, on the other hand, the spending unit is the basic interviewing unit. The primary family is one spending unit; related adults who keep their finances separate are separate spending units and are interviewed in addition to the primary family. The main reason for this more complicated procedure lies in the emphasis placed in the Surveys of Consumer Finances on financial data. It is rare that the head of the family pools, for example, his liquid asset holdings with those of the grown son, the aunt, or the father-in-law who may be a member of his household, and his information about the finances of his relatives is likely to be not quite complete. In families where the head is married, husband and wife are selected alternately as respondents in the periodic surveys, since purchase decisions may originate either with the husband or the wife. Where the head is unmarried (living alone or with relatives) he (or she) is automatically the respondent. This again differs from 130

140 the procedure used in the Surveys of Consumer Finances. There the head is always designated as the respondent (and in a husband-wife family the husband is by definition the head). Interviewing the head is preferable in the Surveys of Consumer Finances, since the head tends to be better informed about the details of the family's financial situation than the wife or other family members. The fact that the periodic surveys operate with a family sample and the Surveys of Consumer Finances with a spending unit sample does not make the two sets of data incomparable. The data from the Surveys of Consumer Finances can be, and often are, transformed from a spending unit to a family basis. The alternate selection of husband and wife in the periodic surveys makes, however, for some lack of comparability. The method of respondent selection in the periodic surveys yields about 60 percent of interviews with the head of the family and about 40 percent with wives. In the Surveys of Consumer Finances there are instances in which the instruction to interview the head of the family cannot be carried out, and then his wife is substituted. Thus the head is interviewed in only 85 percent of the cases. Comparison of the distribution of answers received in the periodic surveys from the husband and wife, respectively, indicates that in many cases there are no perceptible differences. This was the case, for instance, regarding the answers to the question "Are you people better off or worse off than a year ago?" In a few cases, however, for instance in determining attitudes toward different forms of investments, the answers obtained from husbands and wives seem to differ substantially. A fourth decision is between using different samples each time or getting repeated interviews from the same sample. For each of the periodic surveys analyzed in this monograph a new sample was drawn. Thus the information on changes in opinions, expectations, and plans of consumers is obtained by asking the same questions in consecutive surveys of different, though comparable, cross-sections of the population. If the identical sample had been used repeatedly, as is done in panel or reinterview studies, the representativeness of successive measurements would be lessened. Because of panel mortality and panel bias a sample which is interviewed a second or a third time is no longer stricdy representative. In each of the last few years close to 20 percent of American families have changed their place of residence every year; even if much money and ingenuity are devoted to following the movers, there will be some about 10 percent of the total sample after a year according to recent experience who cannot be contacted again. Second, newly formed families and families living in newly built dwellings tend to be under-represented in a panel which has 131

141 been used for a year or more. And third, there are people who feel "fed up" after a lengthy interview, who feel that they have "done their duty," or who have satisfied their curiosity and are unwilling to continue. The refusal rate increases in the second interview with the same panel, particularly if the interviews are lengthy and touch on personal matters. Much less is known about panel bias than about panel mortality, and some preliminary investigations by the Center found litde evidence of such bias for certain attitudinal questions repeated with the same sample at six-month intervals. Nevertheless, it is probable that lengthy interviews about economic attitudes will influence some respondents. They may become more thoughtful about the problems raised in the interview and may therefore no longer be representative. They may anticipate certain questions or be preoccupied with the consequences of their answers instead of talking freely. Finally, repeated interviews conducted by the same interviewer with the same respondent frequently lead to the establishment of friendly relationships, while the survey method as used in the periodic surveys relies on communication with a complete stranger who is not expected to be seen again. However, the panel method yields information which cannot be obtained by repeated interviews with different samples. By using the panel method we may find out not only how the attitudes of the sample have changed, but also may study how each individual in the sample has changed. Panel studies enable us to analyze the impact of changes in attitudes on the spending and saving behavior of the individuals whose attitudes have changed. They enable us to investigate the origin of changes in individual attitudes. And they make it possible to study the reasons for individual fulfillment or nonfulfillment of expressed buying intentions. These important problems, for which the panel or reinterview method must be used (and is being used, for instance in the Ford Foundation studies of the Survey Research Center, mentioned in Chapter 1), are not part of the objectives of this monograph. To study, at the aggregative level, changes in the sentiment and temper of the American people, and the role of such changes in recent economic fluctuations, the panel method is not required. Because of panel mortality and panel bias it was deemed preferable to use a new representative sample in each consecutive survey. 2 a The differences between the panel method and the use of different samples In consecutive surveys have been discussed here In some detail because a recent study places great emphabls on the ose of the panel method for forecasting. See Mo. it. 132

142 Sampling Errors Sample statistics are affected by errors which arise when only a fraction of the population is selected for measurement The proportion of families in the sample having a given attitude, income, age, etc., will usually be somewhat larger or smaller than the population value. (The population value is defined as the proportion of units which would be found to have a given characteristic if the whole population were measured.) If the sample is selected by probability methods, the expected variation of a sample statistic from the corresponding population value can be calculated. The sampling error is a measure of the range of expected variation of a sample statistic from its population value; it does not measure the actual error of a particular sample estimate. The sampling error, as used here, is equal to two standard errors; it is the range chosen frequendy in social research in order to obtain the 95 percent level of confidence. The sampling error indicates the range on either side of the sample estimate within which the population value can be expected to lie with 95 chances in 100. In about five of every 100 cases the population value can be expected by chance to lie outside this range. Most of the time the actual variation of sample estimates from the population value will be less than the sampling error defined above; in about 67 cases of every 100 the population value can be expected to vary within a range of one-half the sampling error from the sample estimates. Table A presents the sampling errors which attach to the data presented in this monograph. We see that the size of the sampling error depends on the size of the sample. Approximately, the sampling error is inversely proportional to the square root of sample size. Findings which relate to subgroups of the population, for example, the middle-income group, therefore have a larger sampling error than those which relate to the entire sample. Table A also shows that the magnitude of the sampling error varies with the size of the proportion being estimated, reaching a maximum, for samples of a given size, when the proportion is 50 percent. In addition, the sampling error is affected by the geographic spread of the sample, that is, the degree of clustering. The greater the concentration of the sample in a few primary sampling areas, in a few cities, towns, or open country segments, and in a few city blocks, the greater is the sampling error. Tables A and B present for each sample size and proportion a low and a high estimate of sampling error. The low estimate is the sampling error which would attach to a finding derived from an unclustered random sample. The high estimate makes a very generous allowance for the 133

143 Table A Approximate Sampling Errors of Reported Percentages (Expressed In Percentage*) NUMBER OF INTERVIEWS ON WHICH THE PERCENTAGE IS BASED Reported percentage % S or 70% or 80% or 90% or 95%

144 increase in sampling error which may result from the clustering of the sample. The sampling error applicable to most of the findings in this monograph lies somewhere between the low and high limits indicated in Tables A and B. The tables are derived from a large number of computations, based largely on the 1955 samples, which included 66 primary sampling areas. For the earlier surveys, when fewer primary sampling areas were used, the high estimate of sampling error should be raised slighdy. 8 The sampling error also varies with the distribution of answers to each question and hence differs somewhat for each finding. However, these differences are small enough to warrant the presentation of a table giving rough estimates of the sampling errors for various percentages and for different numbers of interviews, derived from computations for many individual questions. The use of Table A may be illustrated by referring to the findings of Table 1 in Chapter 1. We see that in October 1955, 22 percent of all people said they were worse off than a year earlier. This finding is based on a sample of about 2000 cases. Table A indicates that for a finding around 20 percent, with 2000 cases, the sampling error is between 1.8 and 2.7 percent Thus the inference that the corresponding population value lies between approximately 19.3 and 24.7 percent has 95 chances in 100 of being correct The finding that at the same date 22 percent of people with incomes between $3000 and $5000 felt worse off (Appendix Table Al), being based on only 628 cases, has a sampling error of 3.0 to 4.1 percent. In the periodic surveys where great emphasis is placed on changes in answers to the same question from one survey to the next, sampling errors of differences are of particular interest. Table B presents the sampling errors of differences for the data analyzed in this monograph. The table applies to differences between proportions involving comparisons over time, for the whole population or for particular groups. It also applies to differences among groups (e.g. the middle and upper income groups) at one point of time that is, from the same survey. If two samples are compared for which the population value is in fact identical, differences greater than sampling error will be observed in 5 cases out of 100. Conversely, if the difference between two percentages exceeds the sampling error of differences, the chances are that the population values differ in the indicated direction. For example, when on the basis of samples of about 1000 cases it was found that the percentage t The sampling errore presented for the 19B1 and 19S2 periodic surreys In (No. 7, p- 102) are somewhat larger, primarily becanse fewer primary sampling areas were included In the sample at that time. Also, the error was stated very conservatively then, since the calculations were somewhat cruder than those underlying Tables A and B above. 135

145 Table B Approximate Sampling Errors of Differences {»prwd In Percentages) SEE OF SAMPLE OK SUBGROUP Site of sample or subgroup FOR PERCENTAGES FROM ABOUT 35% TO 65% 2000 S ^ &I ; FOR PERCENTAGES AROUND 20% AND 80%

146 Table B (Cont.) PC* PEACE STAGES AJtOUND 10% -AND 90% : , S.S FO* PERCENTAGES ABOUND 5% AND 95% S

147 of families who reported a decline in income increased from 18 to 25 percent between the fall of 1953 and June 1954 (Table 2), we were justified in concluding that this proportion had in fact increased between the two dates (the sampling error of differences being about percent for samples of 1000 each and percentages around 20 or 80). However, when this percentage rose from 25 to 27 between June and October 1954, we were not justified in concluding that a further increase of statistical significance had taken place (for the change in this second instance was smaller than the sampling error). In addition to sampling errors, interview surveys are subject to errors of nonresponse aand reporting errors. Nonresponse errors arise because some persons selected for the sample refuse to be interviewed, are not at home after repeated callbacks, are sick, or do not speak English. In the periodic surveys studied here total nonresponse varied from 10 to 14 percent of the selected samples. This included 4-6 percent refusals and 4-6 percent who could not be found at home. Reporting errors occur when respondents do not give the exact information which is called for in the questionnaire. A question may be misunderstood by the respondent, or the interviewer may misunderstand an answer. Occasionally there may be an intentional misstatement by the respondent. Reporting errors are kept at a minimum by good interviewing methods and questionnaire design, by careful training of interviewers, and by establishing rapport with the respondent so that he will answer the questions to the best of his ability. Nevertheless, substantial reporting errors may attach to some findings derived from a single survey. This monograph is based primarily on comparisons of answers obtained in successive surveys. Such comparisons are less vulnerable to reporting errors, for there is reason to assume that reporting errors have the same direction and similar magnitudes in successive surveys making use of the same methods. Interviewing Methods The Survey Research Center places primary emphasis on rapport between respondent and interviewer.* If complete and unbiased expressions of opinions and attitudes are to be obtained, it is essential to secure the confidence and cooperation of respondents. Explanations of the purposes and importance of the inquiry and carefully chosen introductory questions enable the interviewers to arouse the interest of respondents and to enlist their cooperation. 138 * See also No. Ik, pp

148 A conversational atmosphere is established which leads respondents to answer freely in their own words, and often quite extensively. 4 Most of the periodic surveys have opened with the following question: We are interested in how people are getting along financially these days. Would you say that you and your family are better or worse off financially now than you were a year ago?... Why do you say so?... Was there anything (else) which changed your family'sfinancialsituation during the last year? The questionnaire itself is designed for the fixed question free answer method of interviewing. While the answers are free, that is, in the respondent's own words, fixed questions are used to insure comparability of replies on the part of all respondents. The interviewers must use all questions exacdy as formulated in careful pretests. A few questions can be answered in one or two words or in a brief sentence, for example "Do you or does anyone else in the family own an automobile?" or "How old is the head of this household?" Most of the questions, however, are open-ended, for example "Do you happen to know about any unfavorable developments which may make the country's business situation worse?" Unless the respondent answers fully of his own accord, these questions are followed by neutral probes such as "What do you have in mind?", "Anything else?", "Why do you feel that way?" These probes lead the respondent to explain his opinions and feelings fully in his own words. They are also useful in clarifying ambiguous answers and avoiding misunderstandings. In the periodic surveys most topics are introduced by a general question which asks for an over-all evaluation by the respondent, for example "Do you think that during the next twelve months we'll have good times financially, or bad times, or what?" The answers to this question can be classified quite readily on a scale ranging from good times without qualifications to bad times without qualifications. Then follows a probe such as "Why do you think that?" which provides information about the reasons and considerations which are salient to the respondent, without suggesting answers. Finally, the questioning may narrow down to specific items which were not mentioned in response to the more general question, for example, expected tax cuts, the impact on business of recent developments in the cold war, the anticipated effects of an approaching election. Whereas the more general opening questions are repeated in exactly the same form in consecutive periodic surveys, the more specific follow-up questions are changed frequently in accord with the changing events on the economic scene. The obvious problem created by the use of conversational in- 139