What is Consumer Confidence and How is it Measured?
You’ve probably heard the term “Consumer Confidence” before, likely reported on your local news broadcast or business channel. Maybe you’ve heard of the “Consumer Confidence Index” and wondered if those two terms were the same thing, or something different. 
Either way, you’ve probably noticed that these terms are discussed quite often, and seem to matter a great deal to some people. While these terms are related, they are not exactly the same.
If you’ve wondered what these terms mean and why so much weight is placed on them when it comes to predicting the future of the economy, read on to learn about Consumer Confidence, what it is and how it’s measured.
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Consumer Confidence
To put it simply, “Consumer Confidence” is exactly what it sounds like, and at first glance might not need more explanation than that. How confident is the consumer in today’s economy? But let’s break it down a little bit more than that to make sure there’s no confusion.
A consumer is anyone that buys a product or uses a service. So, to an extent, anyone who is involved in one way or the other with the economy could be considered a consumer.
When these consumers pay attention to the news or listen to what other people are saying about the economy or work in a small business themselves, they get an idea of whether things are headed in the right direction, or if we’ve taken a wrong turn.
This general feeling they get about the economy – whether or not things are good, bad or trending up or down – is what is termed as “confidence” in this respect. So, in short, “Consumer Confidence” answers the question, “How do the people in a particular economy feel about that economy at the moment, and looking into the future?
It’s important to note that when we say a consumer is anyone who buys a product or service, we mean it. This is not just how business owners feel, although that is important. This is not just about how people who watch the markets feel, although that matters, too.
This is about everyone, from the most experienced to the most uninformed – how do all of them feel about it?
Consumer Confidence Index
So, now that we know what Consumer Confidence is in general, it’s time to take that idea one step further, to the Consumer Confidence Index (CCI). Like many ideas, Consumer Confidence is most useful if we can find a way to measure it and extrapolate from it. This is where the CCI comes into play.
The Consumer Confidence Index is a measurement of Consumer Confidence, and it’s an attempt to take those unquantifiable feelings and put an actual number to them. Every month, consumers are asked a series of scaled questions about the economy and their feelings towards it. The answers to these questions are then tabulated, and the resulting numbers are referred to as the “Consumer Confidence Index.”
How Is This Measured?
You might be wondering how the CCI is determined. As mentioned above, the CCI is determined by first asking questions. Every month, 5,000 households are sent a short series of questions to answer. These households are randomly selected, and the entire process is overseen by an independent group, known as The Conference Board.
These households answer five questions that relate to either present or future economic concerns. They are:
- An appraisal of current business conditions
- An appraisal of current employment conditions
- An expectation regarding business conditions in six months
- An expectation regarding employment conditions in six months
- An expectation regarding their total family income in six months
As you can see, the first two questions are about present conditions, and the last three are about the future. These two sub-categories are actually reported as separate numbers as well, the Present Situation Index and the Expectations Index.
Between these two numbers and the overall Consumer Confidence Index, investors and analysts get a good idea about how people feel overall.
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Why Does This Matter
You might be wondering why a number like this matters. After all, if the index is simply a measurement of what your average Joe and Jane feel, what good does it really do, other than giving us an FYI of how people feel?
I mean, that’s all well and good, but who cares? However, the CCI does have some important uses and ramifications, and real decisions are made based on this number.
First, the CCI gives a real-time picture of how people feel about the economy, which means it also tells us whether or not people are presently spending money. It’s very simple: if people don’t feel good about the economy or their economic future, they are more likely to hold onto whatever money they can and hold onto a tight budget, rather than spend it.
Therefore, when you have a high degree of consumer confidence, you can expect to see more people out shopping, buying luxury items, saving for bigger expenses, or paying off debts with more frequency.
Not only does this mean more money coming into the economy, but it also means that people feel good about their individual economic situation, which means the country is, as a whole, doing okay.
Another reason the CCI matters is because it gives businesses a real number by which to plan for the future. If CCI is high – especially the numbers relating to expectations (the “Expectations Index”) assumes that people are planning on continuing to buy and spend more. So, companies can stock more inventory and plan for a future in which people are more willing to spend.
Third, since there are millions of small businesses in the US, it’s reasonable to assume that many of the people included in the monthly random sample either own or work at a small business. Those numbers, then, paint a good picture of how small businesses are doing across the country, and how their futures look. This is yet another indicator of economic health.
Of course, the opposite of all these things holds true, as well. If CCI is low, then that means there might be real trouble on the horizon. In these instances, business owners need to know so they can start making plans and tightening their belts, so to speak. Consumers might want to know, as well, so they can plan ahead and shore up their emergency fund if they can.
In addition, the Federal Reserve and other government agencies use this information to start putting preventative measures in place in the hopes of combatting whatever downturn might be on the horizon.
In Conclusion
So, as you can see, the CCI is more than just a random idea about how people feel. Yes, that is what the CCI is when you first look at it, but there’s so much more to it than that.
The CCI gives us a very real window into the workings of local businesses and the local economy – something that can be hard to get otherwise. These numbers tell us how your neighbors down the street are doing, and how they think they will be doing in the next few months. Along with other economic indicators, this gives us a more complete picture of how the economy is doing as a whole.
So, the next time you hear your local reporter talk about the Consumer Confidence Index, you can understand more what is being said and why it matters.
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