Consumer Confidence

What it Measures:

The CB’s Consumer Confidence Index measures the level of optimism (or lack of it) of the average U.S. consumer about their financial health which is expressed through their spending and savings activities. The index is calculated by surveying 5,000 U.S. households asking each household their opinions in five key areas:

1. Current business conditions
2. Business conditions for the next six months
3. Current employment conditions
4. Employment conditions for the next six months
5. Total family income for the next six months

Once the results of the surveys are collected, the questions with positive results are divided by the sum of the positive and negative answers. The result is then compared to the benchmark of 1985, which represents the mid-level of the business cycle and is given a value of 100, to create a composite index.

What effect it has:

If the Consumer Confidence Index comes out higher-than-expected, that usually appreciates the U.S. Dollar. On the other hand, a lower-than-expected Consumer Confidence number will prompt the Dollar’s decline.

The Conference Board’s Consumer Confidence Index is one of the most widely watched of all fundamental indicators, and its revisions can also prompt significant market activity. It tends to act as a leading indicator and its movements can influence equity prices, currency exchange rates and interest-rate policy for the Federal Reserve.

How often it is released:

Results of the Conference Board’s Consumer Confidence Survey are released the last Tuesday of each month at 10 AM EST.

Why it is important:

In general, Consumer Confidence expresses the optimism of the average U.S. consumer with an increase in consumer confidence indicating economic growth simply because consumers are spending money and therefore stimulating the economy. A decrease in consumer confidence would imply that consumers are spending less, hence indicating a decrease in economic growth. Many businesses as well as banks, manufacturers and the government watch the Consumer Confidence Index to base decisions on production, lending activity, taxes and interest rates.

Furthermore, the Consumer Confidence Index shows the public’s perception about the ability to obtain and secure jobs and therefore on how they will spend their income. If the index is in an overall downtrend, consumers will hold back on making large purchases which impacts manufacturers of big-ticket items such as automobiles. Banks are also impacted by a reduction in lending activity and mortgage applications while the government might need to reduce interest rates or offer a tax rebate to stimulate the economy.

If Consumer Confidence is rising, on the other hand, manufacturers can hire more people and increase production while growing demand for credit will increase banking profits, and the government can also expect an increase in tax revenues. A rising index will generally affect currency prices favorably while a declining index will have an inverse effect.

Another widely-watched monthly economic release related to consumer confidence is The University of Michigan Consumer Sentiment Index. This report is based on a telephone survey that gathers information about how people feel about the overall economy.