What the Consumer Confidence Index Measures:
The Consumer Confidence Index measures Americans’ attitudes about current and future economic conditions. It is based on a monthly survey of 5,000 households conducted for The Conference Board. The Board develops a report based on the survey that gives details about consumer attitudes and buying intentions, with data available by age, income, and region. This is compiled into three numbers:
- The overall Consumer Confidence Index
- The Present Situation Index
- The Expectations Index.
The Consumer Confidence IndexThis Index is a composite of the two other indices, and is weighted 40%-Present Situation Index and 60%-Expectations Index.
The Present Situation IndexThis Index is based on two questions the survey asks: 1) How would you rate the present business conditions? and 2) What would you say about available jobs in your area right now?
The Expectations IndexThis 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.
How the Consumer Confidence Index Affects the U.S. Economy:
Consumer confidence is important to the economy because consumer spending drives 70% of economic growth. (See What Are the Components of GDP?) 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 Consumer Confidence Index is a lagging indicator, which means it follows economic trends. It lags because most people don’t really 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.
The Consumer Confidence Index is watched by stock market analysts and investors to get an idea of whether consumer spending will continue to drive the economy. The stock market can move dramatically on the day the Index is published. However, this will probably only happen if there is a lot of uncertainty about the economy.
How the Consumer Confidence Index Affects You:
If the Consumer Confidence Index is trending upwards, this means that stocks will probably go higher, as well. If Confidence is too high, then the excessive demand it is measuring could trigger inflation, which could lead the Federal Reserve to raise interest rates. Higher interest rates could also increase the value of the dollar, which could reduce exports and make imports cheaper.
Recent Consumer Confidence Index Trends:
Consumer Confidence hit a five year peak in February 2007. Since then it has been trending downwards, hitting a low in June 2007, although it still hasn’t gone as low as August 2006.
The Consumer Confidence Index Outlook:
Since Consumer Confidence is a lagging indicator, it will probably continue to trend downwards in the near future, following the GDP and employment economic indicators.
For more about The Consumer Confidence Index and other economic indicators, read The Secrets of Economic Indicators by Bernard Baumol.