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When It Comes To Buying Decisions, Why Feelings Come First

DAVID GREENE, HOST:

How are you feeling seems like the kind of question you might get from a psychiatrist, not an economist. Then again, Stacey Vanek Smith, from NPR's Planet Money team, reminds us about one vitally important economic indicator.

STACEY VANEK SMITH, BYLINE: The Consumer Sentiment Index does pretty much exactly what it sounds like it does. It measures emotions. Companies use it to help them decide how hopeful people are, how much they're going to buy, how many cars they should stock, how many Winnie the Pooh stuffed animals they should stock.

BURT FLICKINGER: They were cute, very furry.

SMITH: Burt Flickinger used the Consumer Sentiment Index to make the first major buying decision of his career. It was 1978; he'd just been promoted to buyer for a chain of department stores. Disney's "Winnie The Pooh" film had been a big hit, and the company was rolling out stuffed bears for the holidays. But in 1978, inflation was going crazy. People didn't have a lot of extra cash, and Flickinger had to figure out if people would spend the cash they had on Winnie the Pooh.

How much money was on the line?

FLICKINGER: About $10 million.

SMITH: Oh, my gosh. You had $10 million riding on Winnie the Pooh?

FLICKINGER: Yes.

SMITH: Flickinger looked at unemployment, at income reports. Those did not look good. But then he looked at the Consumer Sentiment Index. That number had ticked up. Flickinger took a deep breath and bought the bears. Back in the '70s, consumer sentiment was still pretty controversial. The index wasn't new, though. It had been started by economist George Katona decades before. Katona got the idea working at a bank in Germany right after the First World War. He told the story to his colleague, Richard Curtin.

RICHARD CURTIN: The bank used to pay him at noon and give him two hours off to spend it.

SMITH: Because the money would lose value so quickly?

CURTIN: Yeah.

SMITH: Katona saw how people's fear moved the economy. And he thought feelings were an undeniable economic force. He came to the U.S., took a job at the University of Michigan and tried and tried to get people to fund his survey of feelings. It did not happen. Then, the Federal Reserve approached him in 1946 about doing the first-ever survey of people's assets, how much money they had, what their debts were. And Katona found a way to sneak his questions into the Fed's survey.

CURTIN: He convinced the Fed that you couldn't just go out into Iowa and knock on someone's door and say, I'm from the Federal Reserve; I want to know how much you have in your savings accounts. You know, you have to build rapport.

SMITH: And how do you build rapport? By asking people how they feel. To measure feelings, Katona developed five questions. The main question, do you think you'll be better or worse off financially a year from now? Now, there's a lot of debate over whether this actually works. Some economists say feelings don't measure anything. Consumer sentiment took a dive during the government shutdown. The economy was fine. Businesses, though, watch this number closely, just like Burt Flickinger did back in 1978.

How did the Winnie the Pooh dolls work out?

FLICKINGER They sold out too fast. I didn't buy enough (laughter).

SMITH: Flickinger now advises companies like Macy's and T.J. Maxx. He still relies on the Consumer Sentiment Index. He says when it comes to big buying decisions, feelings come first. Stacey Vanek Smith, NPR News.

(SOUNDBITE OF SONG, "FEELINGS")

MORRIS ALBERT: (Singing) Feelings, nothing more than feelings. Transcript provided by NPR, Copyright NPR.