Consumer confidence",

What Is Consumer Confidence?

Consumer confidence is an economic indicator that measures the degree of optimism consumers feel about the overall state of the economy and their personal financial situation. This metric is crucial because consumer attitudes directly influence consumer spending, which is a significant component of Gross Domestic Product (GDP). When consumer confidence is high, individuals are more likely to make large purchases, such as homes or vehicles, and generally increase their spending on goods and services. Conversely, low consumer confidence often signals a potential slowdown in economic activity, as consumers tend to save more and spend less.

History and Origin

The concept of measuring consumer attitudes gained prominence after World War II, as economists sought to understand the forces driving post-war economic activity. In the United States, two primary organizations began conducting regular surveys to gauge consumer sentiment. The University of Michigan initiated its Surveys of Consumers in 1946, a program that continues to provide the widely cited Index of Consumer Sentiment. Later, in 1967, The Conference Board, a non-profit business research organization, introduced its Consumer Confidence Index (CCI). Both indices aim to assess consumers' current financial health and their spending inclinations, with The Conference Board's CCI specifically designed to gauge the overall confidence and financial health of the average U.S. consumer. The Conference Board's Consumer Confidence Index is compiled monthly from a survey of 5,000 households.¹⁶

Key Takeaways

• Consumer confidence is an economic indicator reflecting consumer optimism about the economy and their financial future.
• High consumer confidence typically leads to increased consumer spending, boosting economic growth.
• Low consumer confidence can signal a slowdown in spending and potential economic contraction.
• Key indices include The Conference Board Consumer Confidence Index and the University of Michigan Index of Consumer Sentiment.
• Businesses, policymakers, and analysts monitor consumer confidence for insights into future economic trends.

Formula and Calculation

The Consumer Confidence Index (CCI) and similar measures are not based on a simple mathematical formula in the traditional sense, but rather aggregated from responses to a series of survey questions. Organizations like The Conference Board and the University of Michigan conduct extensive surveys to gather data on various aspects of consumer perception.

For instance, The Conference Board's Consumer Confidence Index is derived from a survey that asks consumers about:

• Current Business Conditions: How they perceive present business conditions.
• Current Employment Conditions: Their assessment of current job availability.
• Expected Business Conditions: Their outlook on business conditions over the next six months.
• Expected Employment Conditions: Their outlook on job availability over the next six months.
• Total Family Income Expected: Their expectations for their household income in the next six months.
• Buying Plans: Their intentions to purchase major items like automobiles, homes, or major appliances.¹⁵

The responses are weighted, and the index is typically benchmarked to a specific year (e.g., 1985 = 100 for The Conference Board's CCI) to allow for historical comparison. The index value reflects the net positive or negative responses across these categories. For example, opinions on current conditions typically make up 40% of The Conference Board's index, with expectations for future conditions comprising the remaining 60%.

Interpreting the Consumer Confidence

Interpreting consumer confidence involves understanding that the index reflects sentiment rather than actual behavior. A rising consumer confidence index generally indicates that consumers feel more secure about their financial situation, which is often a precursor to increased consumer spending.¹⁴ For indices like The Conference Board's CCI, a reading above 100 (its 1985 benchmark) suggests optimism, while a reading below 100 indicates pessimism.¹³

A sustained upward trend in consumer confidence can signal robust economic growth, as it suggests consumers are willing to spend, thus driving demand for goods and services. Conversely, a declining trend can point to slowing economic growth and potentially a looming recession, as consumers may become more cautious, leading to reduced discretionary spending. Economists and policymakers pay close attention to the index's components, particularly the "present situation" versus "expectations" sub-indices, to gauge current economic health versus future outlook.

Hypothetical Example

Consider a hypothetical country, "Prosperia," where the Consumer Confidence Index has been steadily increasing for three consecutive quarters, rising from 95 to 110. This sustained rise suggests that Prosperia's consumers are feeling more optimistic about the economy and their financial prospects.

In response to this growing optimism, a large retailer, "MegaMart," decides to increase its inventory of big-ticket items like electronics and home appliances, anticipating a surge in sales. A local bank, "Prosperous Lending," observes the trend and begins promoting its auto loan and mortgage products more aggressively, expecting higher demand as consumers feel more confident about taking on new debt for significant purchases. The positive consumer outlook contributes to an uptick in retail sales across Prosperia, further stimulating economic activity.

Practical Applications

Consumer confidence data is a vital tool for various stakeholders in the financial markets and beyond. Businesses closely monitor these indices to make strategic decisions. For example, if consumer confidence is high, manufacturers may boost production, and retailers might increase inventories in anticipation of higher demand.

Policymakers, including central banks and government bodies, use consumer confidence as an input for setting monetary policy and fiscal policy. A sustained drop in confidence might prompt central banks to consider lowering interest rates to stimulate borrowing and spending, or governments to implement stimulus packages.¹² This indicator is particularly relevant because consumer spending is the largest component of GDP in many economies, including the U.S. where it represents nearly 70% of total economic output.¹¹ Data from the Federal Reserve Board further details how consumer spending, including that of different household income groups, contributes to overall economic health.¹⁰

Limitations and Criticisms

While consumer confidence indices provide valuable insights, they are not without limitations. One criticism is that these surveys measure intentions and perceptions, which do not always translate directly into actual consumer spending behavior. Consumers might express optimism but still hold back on purchases due to other factors such as high debt levels or uncertainty about future [unemployment].

Another limitation is the potential for survey bias or the "halo effect," where general positive or negative news can unduly influence responses, rather than a genuine change in personal financial circumstances or economic outlook. Furthermore, significant events can cause sharp, temporary shifts in confidence that may not reflect long-term economic trends. For instance, The Conference Board's Expectations Index has remained below the threshold typically signaling a recession for several consecutive months, even if overall confidence shows minor improvements, highlighting the nuance in interpreting these figures.⁹ The efficacy of consumer confidence as a standalone predictor for economic downturns or recoveries is also debated among economists, as it often needs to be considered alongside other robust economic indicators like employment data, inflation rates, and investment levels.

Consumer Confidence vs. Consumer Sentiment

The terms "consumer confidence" and "consumer sentiment" are often used interchangeably, but they typically refer to two distinct indices produced by different organizations, though both aim to gauge similar aspects of consumer attitudes.

Both indices serve as important proxies for future consumer spending and generally move in the same direction, reflecting the overall business cycle. However, their methodologies and specific questions lead to slight differences in their reported values and sometimes their sensitivity to certain economic news. The University of Michigan's Index of Consumer Sentiment is based on five questions, while The Conference Board's CCI is based on five separate questions.

FAQs

Why is consumer confidence important?

Consumer confidence is important because it is a leading indicator of consumer spending, which is the primary driver of economic growth in many countries. When consumers feel secure about their jobs and future income, their willingness to spend increases their purchasing power and stimulates economic activity.

Who publishes consumer confidence data?

In the United States, the two most prominent publishers are The Conference Board, which releases the Consumer Confidence Index (CCI), and the University of Michigan, which publishes the Index of Consumer Sentiment. Other organizations and countries also publish similar indices, such as the OECD's Consumer Confidence Index.⁴

How often is the Consumer Confidence Index released?

Both The Conference Board Consumer Confidence Index and the University of Michigan Surveys of Consumers are released monthly. The Conference Board typically releases its data on the last Tuesday of each month.³ The University of Michigan releases preliminary data mid-month and final results at the end of the month.²

Does consumer confidence predict recessions?

A significant and sustained decline in consumer confidence often precedes or accompanies recession periods. For example, during the Great Recession, the Consumer Confidence Index saw significant declines.¹ However, it is not a perfect predictor and should be considered alongside other economic indicators for a comprehensive economic outlook.