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.
This article will look at what consumer confidence is, and how investors can use the indexed information to make better decisions.
- Consumer confidence is the optimism consumers feel about the state of the economy and their personal financial circumstances.
- Consumer confidence is measured by using surveys to gather information and create an index known as the Consumer Confidence Index.
- The index is important for investors because it can indicate consumer spending and the effectiveness of monetary policy.
How Is Consumer Confidence Measured?
Economists solved the problem of measuring consumer confidence 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 using surveys, they aim to measure the degree of optimism that consumers feel about the overall state of a country's economy and their financial situation.
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, which restricts economic growth. Therefore, international investors pay close attention to the information gathered in these surveys since it can serve as a great leading indicator for the overall economy.
How Consumer Confidence Surveys Work
There are many different types of consumer confidence surveys used worldwide, but most of them operate similarly. Based on a probability-designed random sample, the surveys 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 such as:
- Current business conditions
- Business conditions over the next six to 12 months
- Current employment conditions
- Employment conditions over the next six to 12 months
- Total family income over the next six to 12 months
Participants are generally asked to answer each question as "positive," "negative," or "neutral," which are scored as 1, -1, and 0, respectively. Responses are added up to calculate a "relative value." This value is compared to a baseline "index value," which is often the initial value taken when the surveys first began.
Finally, these index values are averaged to produce an aggregate value that's commonly reported. The CCI survey is updated monthly by The Conference Board.
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. For example, companies such as Nielsen regularly survey consumers in roughly 60 countries, while many countries have various organizations that calculate their own indexes.
Some of the most popular indexes include:
- Canada: Conference Board of Canada Index of Consumer Confidence
- India: Reserve Bank of India Consumer Confidence Index
- Israel: Central Bureau of Statistics Consumer Confidence Index
- Spain: Centro de Investigaciones Sociológicas Consumer Confidence Index
- Britain: GfK Consumer Confidence Barometer
- Global: Nielsen Global Online Consumer Survey
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.
Additionally, as researchers gather more information about consumer behavior, spending and saving patterns emerge that are based on economic and social circumstances, natural occurrences, political sentiments, and many other events. This information can greatly help investors anticipate market prices.
Here are a few common uses:
- Leading indicator: Consumer confidence indices can be used as leading indicators 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.