What is consumer confidence?
Most people hear about consumer confidence or the consumer confidence index from monthly media stories in the United States that report whether confidence has increased or decreased. Consumer confidence is a measurement of how average consumers feel about the current and future state of the U.S. economy. This includes how they feel about buying and spending and how they feel about their personal income and finances. It also includes what consumers think about the conditions of business and the availability of jobs in their area. Consumer confidence can increase or decrease depending on many factors, such as unemployment, inflation, and income. For example, a higher number of help wanted ads in the newspaper and rising stock market prices tend to boost confidence, while fewer available jobs and lower stock prices drop confidence.
How is the consumer confidence index determined?
The consumer confidence index is compiled by The Conference Board, a nonprofit agency founded in 1916. They started measuring consumer confidence in 1967. Other agencies such as the University of Michigan Survey Research Center also publish their own consumer confidence results. Consumer confidence comes from a monthly survey given to a panel of 5,000 households selected from a pool of about 120,000. The survey is collected during the first 18 days of the month and then compiled and released to the public on the last Tuesday of that month.
The survey consists of five questions that help determine how confident the average consumer is on the U.S. economy. The questions focus on:
- How business conditions are in the household's area
- An estimation of how business conditions will be in the next six months
- The amount and quality of jobs currently available in the area
- An estimation of the amount and quality of job that will be available in the next six months
- An estimation of the family income in the next six months
Responders can choose “positive,” “negative,” or “neutral” in response to the questions. Positive responses are divided by negative responses to yield a relative value that helps determine the consumer confidence index. Additionally, The Conference Board also tracks what consumers are planning on buying in the next six months, including cars, homes, trips, and large appliances. All responses are adjusted based on the season, especially the Christmas shopping season. One consumer confidence index is generated for each of the five responses. Two additional indexes are created from the two present and two future assessments. A final composite index is created from 60% of the future assessments and 40% of the current assessments.
This index is compared to a baseline index measured in 1985 that was arbitrarily assigned a value of 100. For reference, the highest consumer confidence index was in January and May of 2000 with a value of 144.7. The lowest index was in December of 1974 with a value of 43.2.
How drastically does the consumer confidence index affect the U.S. economy?
Consumer confidence alone has little impact on the stock market and has a minimal effect on stock prices and exchange rates. Because of this the consumer confidence index is generally not used alone as a measure of the economy but instead is often used with other measures of confidence to analyze the current and future market. However, the index may affect interest rates as high consumer confidence is generally linked to higher consumer spending, which can speed inflation.
What are the benefits and disadvantages of using the index to analyze the economy?
One advantage of the consumer confidence index is that the results are immediately available because the surveys are released the same month they are taken. Also, the survey is rather comprehensive because it is conducted nationally and includes all nine census regions. It also provides analysis of the economy of specific regions and allows comparisons between regions. However, the major disadvantage of the index is that the average consumer does not have enough knowledge to accurately predict their income, business conditions, and job availability six months into the future. Another disadvantage is that estimates of planned spending do not always turn into actual spending. This makes the index much better for analyzing the current situation of the economy rather than predicting what will happen in the future.