The Consumer Confidence Index has two aspects.
First, it reflects consumer sentiments about :
- current economic conditions, and
- it conveys expectations for six months ahead. These provide the Present Situations Index and the Expectations Index.
For the Present Situations Index the consumer is asked two questions concerning current conditions:
Are you optimistic, neutral or pessimistic about:
- business conditions
- employment conditions
For the Expectations Index the consumer is asked three questions concerning prospects for the next six months:
Are you optimistic, neutral or pessimistic of:
- business prospects,
- employment prospects
- income prospects.
Taken together, the overall Consumer Confidence headline index is an average of the responses to the five questions. More positive responses mean higher consumer confidence while more negative ones mean lower consumer confidence. Historical data are available as well as data by age, income and from nine census regions and the top eight states. The report is generally published on the last Tuesday of every month at 10am eastern time. The data is collected by sending 5,000 households a questionnaire by mail.
The Conference Board is the not-for-profit research organization that publishes the Consumer Confidence Index. Its members and trustees, some of them global CEOs and executives, like to know what may be ahead in the global economy to improve their performance and better serve society. The reason why the report is published is because consumer confidence is an important indicator of the economy’s health and more specifically, consumer demand. The U.S. depends heavily on the consumer to fuel the economy as consumption makes up about 70 percent of the size of the economy, which is high relative to the global average. Other economies like China and Thailand depend less on consumption and more on manufacturing. Saudi Arabia and Russia depend more on commodities.
- High consumer confidence would reflect positive sentiments from consumers on the economy.
- Weak readings would reflect negative sentiments on behalf of consumers and the potential for economic weakness.
- Elevated confidence benefits economic growth and paves the way for companies and the economy to continue growing.
This leads to a positive chain of events as revenue growth will likely lead to growth in employment, investment, loans, tax revenue, and ultimately GDP. Falling consumer confidence in the U.S., such as occurred during the 2008 financial crisis and during the COVID-19 recession, would likely weaken global economies.
Since the U.S. depends heavily on imports it carries a trade deficit, meaning that the U.S. imports more than what it exports in dollar value. If U.S. consumers aren’t confident and don’t purchase as many goods from abroad, international economies begin to experience revenue weaknesses across their businesses which could lead to less employment, less investment, less tax revenue, less economic activity. The U.S. has the largest economy in the world, makes up a fourth of global GDP, is the single largest importer in global trade and issues the world’s reserve currency, If the U.S. economy weakens, economic weakness is felt around the globe.
To forecast consumer confidence:
- We can look at economic indicators such as unemployment claims, to see if layoffs present risks of an economic slowdown.
- We can look at retail sales to get a gauge of how consumer spending is holding up.
- And watch foot traffic, air passenger levels and fuel sales to see if consumers are moving around.
- The weekly Redbook Retail Sales report leads the monthly consumer confidence report and is also worth keeping an eye on.
- In addition, listening to company’s earnings calls and monitoring the stock performance of some of the biggest consumer servicing companies for signs of a consumer slowdown or expansion is useful: Walmart, Amazon, Apple, Costco, Kroger, Hope Depot, Bank of America, FedEx are some to pay attention to.
Higher interest rates have weighed on consumer confidence in the past as consumers faced higher costs to finance durable items such as cars, refrigerators and furniture. Paying attention to changes in monetary policy and the possible subsequent falls in consumer confidence and company revenues are worth monitoring.
Although not always the driving market force, stock prices might drop if consumer confidence falls short of economists’ expectations, and might lead to rising stock prices when better than expected. Increased confidence from consumers leads to more economic activity and fundamentally supports higher stock prices globally.
Because the U.S. consumer fuels company revenues on a global scale, tracking consumer confidence, for signs of an economic slowdown or economic expansion is important.
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