Consumer Confidence and Its Impact on the Markets

Woman shopping at a small business boutique clothing store.
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There is little question that consumer spending fuels most developed service-based economies, including the U.S. where it represents about 70% of gross domestic product (GDP). While measuring this spending is rather straightforward, predicting future trends can be very difficult given the fickle and scattered nature of consumers on an aggregate basis.

Economists solved this problem by developing what is now known as the Consumer Confidence Index (CCI). By questioning a statistically significant number of people residing within a given country, these surveys aim to measure the degree of optimism that consumers feel about the overall state of a country's economy, as well as their own personal financial situation.

International investors pay close attention to these surveys since they can serve as a great leading indicator for the overall economy. When consumers are confident in their futures, they tend to spend money and drive economic growth higher. When consumers aren't confident, they tend to save rather than spend and perhaps constrain economic growth.

In this article, we will look at how consumer confidence surveys work and how investors can use that information to make better decisions.

How Consumer Confidence Surveys Work

There are many different types of consumer confidence surveys being used around the world, but most of them operate in a similar way. Based on a probability-designed random sample, the surveys simply ask a series of questions designed to assess the consumer's current and future outlook to capture their views of the economy and financial situation.

Questions typically cover things like:

  • Current business conditions.
  • Business conditions over the next 6-12 months.
  • Current employment conditions.
  • Employment conditions over the next 6-12 months.
  • Total family income over the next 6-12 months.

Participants are generally asked to answer each question as "positive", "negative" or "neutral", which are scored as "1", "-1" and "0", respectively, and added up to calculate a "relative value". This value is then compared to a baseline "index value", which is often the initial value taken when the surveys first began—often several decades ago. Finally, these index values are averaged to produce an aggregate value that's commonly reported.

The goal of consumer confidence surveys is to predict future consumer spending patterns with the premise that more confidence leads to more buying and stronger economic growth.

Consumer Confidence Around the World

There are many different measures of consumer confidence used around the world. Companies like Nielsen regularly survey consumers in roughly 60 different countries, while many countries have various organization that calculates their own indices.

Some of the most popular indices include:

Using Consumer Confidence Data

Consumer confidence data is an extremely important leading indicator for investors given its ability to predict consumer-spending patterns. These spending patterns can be useful predictors of everything from gross domestic product (GDP) growth to the effectiveness of monetary policy in combating low unemployment and inflation.

Here are a few common uses:

  • Leading Indicator: Consumer confidence indices can be used as a leading indicator for a broad economic turnaround, including resumed growth in GDP.
  • Policy Effectiveness: Consumer confidence can be used to gauge the effectiveness of a monetary policy, stimulus or other measures used by regulators to jumpstart growth.
  • Retail Sector: Consumer confidence is particularly important in the retail and luxury goods industries since their revenues are highly correlated with spending patterns.