Consumer Confidence Index, News, and Impact
Consumer Confidence Reaches 18-Year High
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.
Confidence has improved significantly from its all time low of 25.3 in February 2009. The record high since the index launch in 1977 was 144.7, reached in May 2000. That's according to the Consumer Confidence Index Monthly Data compiled by the University of Wisconsin.
How It Works
The Consumer 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.
The Board bases the index on a monthly survey of 5,000 households. The report gives details about consumer attitudes and buying intentions. It gives a national summary and a break down by age, income and region of the country.
There are actually three indices in each month's Consumer Confidence Report. The first is the Present Situation Index. It 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 second is the Expectations Index. It 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.
The third and most popular is the Consumer Confidence Index. It is a composite of the two other indices. Forty percent of it based on the Present Situation Index and 60 percent is based on the future Expectations Index.
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 percent of U.S. gross domestic product. The other components of GDP are business investment, 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. Still others have lost their homes. Therefore, 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 jobs 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.