Consumer Confidence and Its Impact on the Markets
Discover How Consumer Confidence Influences Investor Confidence
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 calculated 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 Neilsen regularly survey consumers in more than 50 different countries, while many countries have various organization that calculate their own indices.
Some of the most popular indices include:
- Canada - Conference Board of Canada's Index of Consumer Confidence
- India - BluFin Consumer Confidence Index
- Israel - Globe's Israeli Consumer Confidence Index
- Spain - Instituto de Credito Oficial Spanish Consumer Confidence Index
- Britain - GfK's Consumer Confidence Barometer
- Global - Nielsen Global Online Consumer Survey
Using Consumer Confidence Data
Consumer confidence data is extremely important leading indicator for investors given its ability to predict consumer-spending patterns. These spending patterns can be useful predictors for everything from gross domestic product ("GDP") growth to the effectiveness of monetary policy in combatting 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 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.
Key Takeaway Points
- Consumer confidence surveys are designed to statistically quantify consumers' confidence in the overall economy and their own personal finances.
- The surveys consist of a series of questions that are scored and compared to an index value to provide a single key metric showing growth or decline.
- Consumer confidence data is extremely useful for investors as a leading indicator of economic health, as well as in evaluating individual policies or sectors.