Consumer Confidence Index: News, Impact

Consumer Confidence Continues to Climb

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Consumer confidence is needed to boost economic growth. Photo: Fuse/Getty Images

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Consumer confidence rose again in March to 125.6. It had risen to 116.1 in February. That's the first time it beat the pre-recession high of 111.9 reached in July 2007.  (Source: Consumer Confidence Board

Confidence improved significantly from its all-time low of 25.3 in February 2009. The all-time (since 1977) high reading for the index was 144.7, reached in May 2000.  (Source: "Consumer Confidence Index Monthly Data," University of Wisconsin.)

Definition

The Consumer Confidence Index is a measurement of Americans’ attitudes about current and future economic conditions. It tells you how optimistic people are about the economy and their ability to find jobs. It reports on beliefs about present and future economic conditions.

The Index is based on a monthly survey of 5,000 households conducted by The Conference Board. The Board develops a report based on the survey. It gives details about consumer attitudes and buying intentions. Data can be broken out by age, income, and region.

Three different indices go into the Consumer Confidence Report:

  1. The Consumer Confidence Index is a composite of the two other indices. Forty percent is the Present Situation Index and 60 percent is the future Expectations Index.
  2. The Present Situation Index is based on two questions the survey asks. 1) How would you rate the present business conditions?  2) What would you say about available jobs in your area right now?
  1. The Expectations Index is based on respondents' predictions for business conditions and available jobs six months from now. It also measures whether those surveyed think their incomes will be higher, lower or about the same in six months.

The Conference Board created the Index in 1967. The number compares the most recent month's confidence to 1985.

That year, the Index was 100 exactly. If the most recent Index is above 100, then consumers are more confident than they were in 1985. If it's below 100, they are less confident than during the Reagan Administration.

How It Affects You

Consumer confidence is the primary driver of demand in the U.S. economy. When trust in the future is high, people shop more. That increases consumer spending, which is nearly 70 percent of U.S. gross domestic product. If consumers are uncertain about the economy, they will buy less, and the economy will slow further. If consumer confidence increases, then the economy will grow. The other components of GDP are business investment, government spending, and net exports.

The Consumer Confidence Index is a lagging indicator. That means it follows economic trends. It lags because most people don’t feel that the economy has changed until after it actually has. Furthermore, the survey asks how easy it is to find jobs. Usually, it doesn’t become difficult to find jobs until after the economy has turned.

That’s because unemployment is, itself, a lagging indicator. That's because the last thing managers want to do is lay off their workers. In a recession, they cut every other cost first.

By the time they begin layoffs, the recession is well underway.

Investors and stock market analysts monitor the Consumer Confidence Index closely. They want to get an idea of whether consumer spending will increase or drop. Any rise can spur business spending to meet the demand. That increases earnings and stock prices. For that reason, investors are more likely to buy stocks if the consumer confidence index rises.

The stock market can move dramatically on the day the Index is published. But this will probably only happen if there is a lot of uncertainty about the economy.

If confidence goes too high, then the excessive demand it is measuring could trigger inflation. That could lead the Federal Reserve to raise interest rates. Higher interest rates increase the value of the dollar, That reduces exports and makes imports cheaper.

 

For more about The Consumer Confidence Index and other economic indicators, read The Secrets of Economic Indicators by Bernard Baumol.