Consumer Confidence Index, News, and Impact
Consumer Confidence Drops in August
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.
The Consumer Confidence Board reported the Index was 84.8 in August, down from its post-COVID peak of 98.3 in June 2020. All are lower than the pre-COVID February reading of 130.7.
Consumer confidence plummeted in response to the COVID-19 pandemic. The government requested non-essential businesses to close and asked families to shelter-in-place.
Both readings are worse than the pre-recession high of 111.9 reached in July 2007. And both are lower than the 137.9 recorded in October 2018. That was the highest level in 18 years.
Confidence is still better than its record low of 25.3 in February 2009. The record high since the index launch in 1977 was 144.7, reached in May 2000.
How It Works
The Consumer Conference Board created the Index in 1967. The number compares the most recent month's confidence to what it was in 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.
The Board bases the index on a monthly survey of 5,000 households. The report gives details about consumer attitudes and buying intentions. It provides a national summary and a break down by age, income, and region of the country.
There are three indices in each month's Consumer Confidence Report.
Present Situation Index
The Present Situation Index measures the response to two questions the survey asks:
- How would you rate the present business conditions?
- What would you say about available jobs in your area right now?
The Expectations Index reports 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.
Consumer Confidence Index
The most popular is the Consumer Confidence Index. It is a composite of the two other indices. Forty percent of it is based on the Present Situation Index and 60% is based on the future Expectations Index.
The chart below illustrates the changing consumer confidence index from 1967 through today.
How It Affects You
Consumer confidence is the primary driver of demand in the U.S. economy. If people are uncertain about the future, they will buy less. That slows economic growth. When trust in the future is high, people are more willing to shop. That increases consumer spending, which is almost 70% of U.S. gross domestic product. The other components of GDP are business investments, government spending, and net exports.
If confidence increases too much, then people will spend more instead of saving. It creates higher demand that could trigger inflation. To stop it, the Federal Reserve will raise interest rates. That slows economic growth. It also increases the value of the dollar. That reduces exports because they are now priced higher in foreign markets. It makes imports cheaper, which also reduces inflation.
The Consumer Confidence Index is a lagging indicator. That means it follows economic trends. Most people don’t feel that the economy has changed until months later. For example, even when a recession is over, people don’t feel it. Many are still unemployed. Others are in debt incurred while they were jobless. Some others have lost their homes. They are uncertain whether the economic climate has improved.
The lag also occurs when a recession begins. People still feel confident. It takes time before they lose their jobs or homes. Even if they’ve lost a job, they feel they can get a new one as fast as they did a few years ago.
It might take six months before they realize there aren’t any jobs. By that time, they’ve gone into debt and maybe defaulted on their mortgage.
The survey also asks how easy it is to find jobs. Usually, it doesn’t become difficult to find work until after the economy has turned. That’s because unemployment is also a lagging indicator. The last thing managers want to do is lay off their workers. They cut every other cost first. By the time they begin layoffs, the recession is already 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 decrease. 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. Investors welcome any added insight the Consumer Confidence Index can provide.
The Conference Board. “Consumer Confidence Survey.” Accessed July 28, 2020.