Consumer confidence

What Is Consumer Confidence?

Consumer confidence is an economic indicator that gauges the degree of optimism consumers feel about the overall state of the economy and their personal financial situation. This sentiment influences their spending and saving behaviors, which, in turn, can significantly impact economic activity. As a key component within the broader category of macroeconomic data, consumer confidence reflects current perceptions and future expectations, offering insights into potential shifts in consumer demand and overall Gross Domestic Product (GDP).

History and Origin

The concept of measuring consumer sentiment emerged in the mid-20th century, recognizing the significant role of consumer spending in economic fluctuations. One of the most prominent measures, the Consumer Confidence Index (CCI), is produced by The Conference Board, a non-profit research organization. The Conference Board began its Consumer Confidence Survey (CCS) in 1967 as a bi-monthly mail survey, transitioning to monthly collection and publication in June 1977.¹⁹ This survey has maintained consistent concepts and questions since its inception, making its data historically comparable.¹⁸ The CCI quickly became a widely watched barometer of the U.S. economy, with its readings influencing decisions by businesses, policymakers, and financial analysts.

Key Takeaways

• Consumer confidence is a vital economic indicator reflecting consumer optimism about economic conditions and personal finances.
• It is often measured by surveys like The Conference Board Consumer Confidence Index (CCI) and the University of Michigan Index of Consumer Sentiment.
• High consumer confidence typically suggests increased consumer spending, while low confidence may indicate a slowdown.
• Analysts use consumer confidence data to anticipate trends in retail sales, durable goods purchases, and overall economic growth.
• While useful, consumer confidence has limitations, as it measures sentiment, not actual spending behavior, and can be influenced by various factors.

Formula and Calculation

Consumer confidence itself is not calculated via a simple financial formula but rather compiled from survey responses. For example, The Conference Board Consumer Confidence Index is derived from a survey of 3,000 households across the U.S. that are asked five questions.¹⁷ These questions cover consumers' appraisals of:

• Current business conditions.
• Current employment conditions.
• Expected business conditions six months hence.
• Expected employment conditions six months hence.
• Expected total household income six months hence.¹⁶

Each question offers three response options: positive, negative, or neutral. For each question, the positive responses are divided by the sum of positive and negative responses to yield a "relative" value. These relative values are then benchmarked against their average values from the calendar year 1985 (which is set to 100) to create index values for each question. The overall Consumer Confidence Index is the average of these five individual indexes.¹⁵ Separate sub-indexes, such as the Present Situation Index (averaging current conditions questions) and the Expectations Index (averaging future expectations questions), are also derived.¹⁴

Interpreting Consumer Confidence

Interpreting consumer confidence involves analyzing its numerical value and directional changes. A reading above 100 on an index like the CCI (which is benchmarked to 1985=100) generally indicates optimism, while a reading below 100 suggests pessimism. A rising trend in consumer confidence suggests that consumers are becoming more optimistic, which can precede increased personal consumption expenditures, particularly for large-ticket items such as homes and automobiles. Conversely, a declining trend indicates a deteriorating outlook, potentially leading to reduced spending and a slowdown in economic activity.

Significant changes in the index—typically moves of 5% or more—are often seen as indicators of a shift in the economy's direction. For instance, if the index shows a month-on-month decrease, it might signal that consumers are less confident about job security or their ability to make major purchases. This can prompt businesses to adjust inventory levels or delay investments. Conversely, a rising index can signal improved buying patterns and encourage business expansion. The Expectations Index, specifically, is often watched as a potential leading indicator for future recession risks if it falls below a certain threshold.

##¹³ Hypothetical Example

Consider a hypothetical scenario in which the Consumer Confidence Index (CCI) for a country has been steadily declining for three consecutive months, moving from 105 to 98, then to 92. This persistent downward trend signals a clear shift in consumer sentiment from optimism to increasing pessimism. Businesses, such as a large electronics retailer, would likely take note of this.

Seeing the low consumer confidence, the electronics retailer might anticipate a decrease in sales of high-priced items like new televisions and computers, which are considered durable goods and are often postponed during uncertain times. In response, the retailer might adjust its inventory orders downwards, reduce promotional spending on big-ticket items, and instead focus on essential accessories or smaller, more affordable electronics. This preemptive action, based on the consumer confidence data, helps the retailer manage its cash flow and mitigate potential losses from unsold inventory if actual consumer spending declines as anticipated.

Practical Applications

Consumer confidence is a crucial input for various stakeholders in the financial and economic landscape.

• For Businesses: Manufacturers and retailers closely monitor consumer confidence to anticipate demand for their products and services. A drop in consumer confidence, for instance, might lead companies to cut production, reduce new investments, or delay hiring. Conversely, rising confidence can encourage them to expand operations and stock up on inventory in anticipation of increased sales.
• For Policymakers: Central banks and governments consider consumer confidence when formulating monetary policy and fiscal policy. A sustained decline in confidence might prompt the Federal Reserve to consider interest rate cuts to stimulate borrowing and spending, while a government might propose fiscal stimulus measures like tax rebates to boost economic activity. Research from Federal Reserve banks has explored how consumer sentiment can help forecast household expenditures, even when accounting for other economic indicators.
• ¹² For Investors and Analysts: Financial analysts and investors use consumer confidence as a gauge of future economic growth and corporate earnings. Strong consumer confidence can signal a healthy economic environment, potentially leading to higher stock valuations, particularly for companies in consumer discretionary sectors. Conversely, waning consumer confidence can indicate headwinds, influencing investment strategies and portfolio allocations. For example, a Reuters report highlighted how companies faced pricing dilemmas and waning consumer confidence due to tariffs, affecting their strategies for passing on costs to consumers.
• ¹¹ For Economic Forecasting: Economists integrate consumer confidence data into their models to predict future trends in inflation, unemployment rate, and overall economic growth. It helps to understand the psychological component driving spending beyond purely fundamental economic factors.

Limitations and Criticisms

While consumer confidence is a widely followed indicator, it has several limitations and faces criticisms. One major critique is that it measures intentions and perceptions rather than actual spending behavior. While a correlation often exists, high confidence does not guarantee increased spending, nor does low confidence guarantee a complete halt. External factors and actual financial constraints, such as high interest rates or a lack of real wage growth, can override optimistic sentiment.

An¹⁰other limitation is that survey results can be highly volatile and susceptible to short-term news events or political developments, sometimes leading to "noise" that doesn't reflect underlying economic fundamentals. Some studies have debated the predictive power of consumer confidence beyond what other established economic indicators already provide. For⁹ example, a Federal Reserve Bank of Kansas City paper noted that if forecasters already account for factors like household income, consumer confidence might not offer significant additional predictive value.

Fu⁸rthermore, the methodologies of different consumer confidence surveys can vary, leading to discrepancies in their readings. The two most prominent U.S. surveys, The Conference Board CCI and the University of Michigan Index of Consumer Sentiment, use different sample sizes and question sets, which can result in divergent signals. The⁷se differences can sometimes confuse interpretation for analysts attempting to gain a clear picture of consumer attitudes. The subjective nature of sentiment also means it can be influenced by behavioral economics factors, which are not always rational or directly tied to quantifiable economic data.

Consumer Confidence vs. Consumer Sentiment

While often used interchangeably, "consumer confidence" and "consumer sentiment" typically refer to similar concepts measured by distinct surveys, each with its own methodology and focus.

Consumer Confidence is primarily measured by The Conference Board Consumer Confidence Index (CCI). This index surveys approximately 3,000 households and focuses on consumers' assessments of current business and labor market conditions, as well as their expectations for these conditions and their household income six months into the future. It is often seen as reflecting consumers' views on the broader financial conditions and the job market.

⁶Consumer Sentiment is measured by the University of Michigan Index of Consumer Sentiment (MCSI). This survey collects information from about 500 households and has a broader range of questions. The MCSI tends to focus more on consumers' expectations regarding their personal finances and buying conditions for durable goods, such as vehicles and homes. Man⁵y economists view the University of Michigan's Index of Consumer Sentiment as a better leading indicator of future personal consumption expenditures due to its greater emphasis on "pocketbook issues" like prices and income.

De⁴spite these differences, both indexes aim to gauge the "mood of the American consumer" and provide valuable insights into potential shifts in spending behavior and overall economic cycles. Bot³h are closely watched by market participants and policymakers alike.

FAQs

What does a high consumer confidence reading mean?

A high consumer confidence reading indicates that consumers are optimistic about the economy and their personal financial prospects. This optimism generally suggests they are more likely to spend money, particularly on significant purchases like cars or homes, which can stimulate economic growth and benefit businesses.

How often is consumer confidence data released?

In the United States, major consumer confidence reports, such as The Conference Board Consumer Confidence Index, are typically released monthly. This regular publication allows economists and analysts to track changes in consumer attitudes over time and react to new data promptly.

##²# Does consumer confidence predict recessions?
Consumer confidence can be a useful, though not perfect, indicator for predicting recession risks. A sustained and significant decline in consumer confidence often precedes an economic downturn because reduced consumer spending is a major contributor to recessions. For instance, the Expectations Index component of the CCI falling below a certain threshold has historically signaled a recession ahead. How¹ever, it's one of many economic indicators economists consider.

What factors influence consumer confidence?

Many factors can influence consumer confidence, including the state of the job market (e.g., unemployment rate), changes in household income, levels of inflation and interest rates, stock market performance, and major geopolitical events. Positive news on these fronts tends to boost confidence, while negative news can depress it.

Why do policymakers care about consumer confidence?

Policymakers, including central bankers and government officials, pay close attention to consumer confidence because personal consumption expenditures account for a significant portion of a nation's Gross Domestic Product. Understanding consumer sentiment helps them anticipate future economic activity and determine whether measures like changes in monetary policy or fiscal policy are needed to stabilize or stimulate the economy.