What is the Consumer Confidence Index?

What is the Consumer Confidence Index?

Reading time: 6 minutes

Consumer confidence is vital for businesses and investors, with consumer spending making up a large part of the Gross Domestic Product (GDP). 

Consumer spending is an important indicator of an economy's health, reflecting optimism as well as pessimism from the consumer's perspective. This optimism translates into spending behaviour, impacting everything from car purchases to grocery bills. 

How do we measure the perspective of the consumer?

This is where the Consumer Confidence Index (CCI) and the University of Michigan’s Consumer Sentiment Survey step in. Both provide a monthly assessment of how consumers feel about economic conditions. As the line chart comparison below demonstrates, the two measures boast a strong long-term correlation, yet there are instances where the measures diverge. 

Given that the US remains the largest economy in the world, this article will focus on the US and, in particular, the Consumer Confidence Index.

What is the Conference Board’s Consumer Confidence Index (CCI)?

The Conference Board releases the CCI on the last Tuesday of each month at approximately 3:00 pm GMT and is widely followed by economists, investors, and traders. According to the Conference Board, ‘the index is based on consumers’ perceptions of current business and employment conditions, as well as their expectations for six months hence regarding business conditions, employment, and income’.

Interestingly, the CCI began releasing data as far back as 1967 in the form of a mail survey every two months, though it transitioned to a monthly survey in 1977. As of 2021, the CCI’s survey has been conducted primarily online; the change to an online survey from mail has seen survey responses increase to approximately 3,000 respondents each month.

Within the CCI, the survey questions (five in total) help form three widely followed indexes: the Consumer Confidence Index, the Present Situation Index (based on consumers’ assessment of current business and labour market conditions) and the Expectations Index (consumers’ short-term outlook for income, business, and labour market conditions). The five questions range from an assessment of current business and employment conditions to expectations concerning business and employment as well as total family income. As demonstrated in the image below (from the Conference Board), the Present Situation Index is made up of an average of the first two questions, with the remaining three making up an average for the Expectations Index. All five questions, nonetheless, are used to form an average for the Consumer Confidence Index. 

Decoding the CCI

It is important to understand that economists interpret the CCI as a lagging indicator. Consumers react to economic conditions: As the economy expands, along with stable inflation (prices) and lower unemployment, consumers tend to report feeling more confident and optimistic about the future. Of course, tax cuts will also increase consumers’ optimism. Conversely, consumers are naturally more pessimistic in economic downturns. 

The CCI index is benchmarked to 100 (1985=100). A score of 100 represents average consumer confidence, and anything above indicates optimism, while values below signal pessimism. As of writing, the CCI recently made the airwaves for January 2024 and surprised markets, rising to 114.8, up from a downwardly revised 108.8 in December 2023. The Present Situation Index jumped to 161.3 from 147.2 last month and the Expectations Index also improved to 83.8 in January, up from a revised reading of 81.9 in December 2023. As you can see from the chart below provided by the Conference Board, the Present Situation Index and the Expectations Index have been gradually improving in recent months.

Importantly, it is recommended not to focus on the month-to-month change with this indicator (this is advised for most indicators) and to focus more on the longer-term trend (several months).

Ultimately, businesses use the CCI to anticipate consumer demand and adjust production and marketing strategies accordingly (this is where the CCI can function as a leading indicator). Investors, on the other hand, employ the CCI to assess market sentiment, while policymakers use the CCI to gauge the effectiveness of economic policies and formulate further strategies. It's key to remember, however, that the CCI is just one piece of the economic puzzle. While valuable, it shouldn't be solely relied upon in isolation for decision-making. Other factors, like GDP growth, inflation and unemployment figures, should be considered to determine an overall picture of the economy.

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