Consumer confidence is the degree of optimism shown by a group and expressed through their savings and spending activities. The group could be small or a whole country. Several countries have metrics for measuring confidence but this analysis varies greatly around the globe. The U.S. started measuring this in 1967 with the “Consumer Confidence Index” which is issued monthly. It is benchmarked to 1985 which is considered to be a neutral year.
So how does this affect me?
Many manufacturers, retailers, banks, and the government monitor this index and use the data in their decisions and strategies. Some examples are:
- Retailers may cut back inventories and jobs in response to negativity or expand the same in response to positive data.
- Banks may expect an increase or decrease in lending activity.
- Governments may take fiscal or monetary actions including raising or lowering interest rates.
- Goods and services may be artificially inflated or deflated in response to data.
The data from this index may point to changes in the economy since roughly 70% of U.S. GDP is created by consumer spending on goods and services. Interpretation of results may be better suited to that of long term trends verses those of individual monthly results. Unfortunately, today’s news hungry media creates “news bites” out of these results which could in turn fuel greater a degree of confidence or lesser. People who continually watch these results probably don’t get too excited about numbers until they are +- 5% or begin to signify longer term trends.
Even if CCI results are reasonably correct, the reasons for changes are not. Consumer attitudes and actions are clouded with ambiguity and at times this can change unpredictably fast. This is best exemplified in the Dow Jones Industrial moving from an October 2007 high of 14000+ to a March 2009 low of 6500. Certainly few predicted this, or at the very least failed to predict when it would happen.
While the measures of consumer attitudes have been increasingly used over the years, only time and research will tell if their forecasting power will persist. And in fact, some argue that the index only reflects “the public’s awareness of economic conditions” or even more concerning, it could be ”the public’s perception of economic conditions.”
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