In simple terms, increased consumer confidence indicates economic growth in which consumers are spending money, indicating higher consumption. Decreasing consumer confidence implies slowing economic growth, and so consumers are likely to decrease their spending. The idea is that the more confident people feel about the economy and their jobs and incomes, the more likely they are to make purchases. Declining consumer confidence is a sign of slowing economic growth and may indicate that the economy is headed into trouble.
Usage
Manufacturers, retailers, banks and the government monitor changes in the CCI in order to factor in the data in their decision-making processes. While index changes of less than 5% are often dismissed as inconsequential, moves of 5% or more often indicate a change in the direction of the economy.
A month-on-month decreasing trend suggests consumers have a negative outlook on their ability to secure and retain good jobs. Thus, manufacturers may expect consumers to avoid retail purchases, particularly large-ticket items that require financing. Manufacturers may pare down inventories to reduce overhead or delay investing in new projects and facilities. Likewise, banks can anticipate a decrease in lending activity, mortgage applications and credit card use. When faced with a down-trending index, the government has a variety of options, such as issuing a tax rebate or taking other fiscal or monetary action to stimulate the economy.
Conversely, a rising trend in consumer confidence indicates improvements in consumer buying patterns. Manufacturers can increase production and hiring. Banks can expect increased demand for credit. Builders can prepare for a rise in home construction, and government can anticipate improved tax revenues based on the increase in consumer spending.
Consumer-demand surveys versus consumer-confidence and -sentiment surveys
Consumer-demand surveys are interview-based statistical surveys that measure the percentage of households that will buy a car, white goods, PCs, TVs, home furnishings, kitchenware, or toys in, for example, the next three-month period. The surveys provide a percentage of those who will purchase more, less, or the same amount of food and clothing in the next three months than in the corresponding period the year before. If you ask people about their purchasing behavior within the coming six or 12 months, there will be more of those who "hope to be able to buy", than if consumers are asked about what they will purchase in the next three months. The shorter the time spans, the closer to actual behavior.
Consumer confidence and sentiment surveys measure how people are doing financially, how they look at the overall economy of the country or business conditions in the country, if they think that the government is doing a good or a poor job and if people think that it is a good or a bad time to buy a car or to buy or sell a house.
When the business cycle is fairly stable, consumer demand surveys and consumer confidence and sentiment indices will often correlate closely and indicate the same direction of the economy, but in times with a high degree of economic or political uncertainty or during a prolonged crisis, the two types of consumer surveys might differ significantly. In 2011, confidence and sentiment surveys went up from March to April, while consumer demand surveys dropped significantly. In August 2011, the confidence and sentiment surveys dropped significantly and stayed low during September and October, while consumer demand surveys showed resilience, a development confirmed later by official statistics.
A 2022 study found that the consumer confidence index always plays a positive and statistically significant function in the development of consumption.[1]
In Canada
The Conference Board of Canada's index of consumer confidence has been ongoing since 1980. It is constructed from responses to four attitudinal questions posed to a random sample of Canadian households. Those surveyed are asked to give their views about their households' current and expected financial positions and the short-term employment outlook. They are also asked to assess whether now is a good or a bad time to make a major purchase, such as a house, car or other big-ticket items.
In Indonesia
Consumer Survey-Bank Indonesia (CS-BI) is a monthly survey that has been conducted since October 1999 by Bank Indonesia.[2] The survey represents the consumer confidence about the overall economic condition, general price level, household income, and consumption plans three and six months ahead. Since January 2007, the survey is conducted with approximately 4,600 household respondents (stratified random sampling) in 18 cities: Jakarta, Bandung, Semarang, Surabaya, Medan, Makassar, Bandar Lampung, Palembang, Banjarmasin, Padang, Pontianak, Samarinda, Manado, Denpasar, Mataram, Pangkal Pinang, Ambon, and Banten. At a significance level of 99%, the survey has a sampling error of 2%. Data canvassing run through interviews by phone and direct visits in particular cities that is based on rotational system. The Balance Score Method (net balance + 100) has been adopted to construct the index, where the index above 100 points indicates optimism (positive responses) and vice versa. The consumer confidence index (CCI), is an average of the current economic condition index (CECI) and consumer expectation index (CEI).
Other indexes
Danareksa conducts a monthly consumer survey to produce the Consumer Confidence Index.[3]
In the United States, The Conference Board, an independent economic research organization, issues monthly measures of consumer confidence based on 5,000 households. Such measurement is indicative of the consumption component level of the gross domestic product. The Federal Reserve looks at the CCI when determining interest rate changes.
Consumer confidence is defined by The Conference Board as the degree of optimism on the state of the United States economy that consumers are expressing through their activities of savings and spending. Global consumer confidence is not measured. Country-by-country analysis indicates huge variance around the globe. In an interconnected global economy, tracking international consumer confidence is a lead indicator of economic trends.[5]
The consumer confidence index started in 1967 and is benchmarked to 1985 = 100.[how?] The index is calculated each month on the basis of a household survey of consumers' opinions on current conditions and future expectations of the economy. Opinions on current conditions make up 40% of the index, with expectations of future conditions comprising the remaining 60%. In the glossary on its website, The Conference Board defines the Consumer Confidence Survey as "a monthly report detailing consumer attitudes and buying intentions, with data available by age, income and region".
Each month, The Conference Board surveys 5,000 US households. The survey consists of five questions that ask the respondents' opinions about the following:[6]
Current business conditions
Business conditions for the next six months
Current employment conditions
Employment conditions for the next six months
Total family income for the next six months
Survey participants are asked to answer each question as "positive", "negative" or "neutral." The preliminary results from the consumer confidence survey are released on the last Tuesday of each month at 10am EST.
Once the data have been gathered, a proportion known as the "relative value" is calculated for each question separately. Each question's positive responses are divided by the sum of its positive and negative responses. The relative value for each question is then compared against each relative value from 1985. This comparison of the relative values results in an "index value" for each question.
The index values for all five questions are then averaged together to form the consumer confidence index; the average of index values for questions one and three form the present situation index, and the average of index values for questions two, four and five form the expectations index. The data are calculated for the United States as a whole and for each of the country's nine census regions.
Other indexes
In addition to the Conference Board's CCI, other survey-based indices attempt to track consumer confidence in the United States:
The University of Michigan Consumer Sentiment Index (MCSI) is a consumer confidence index published monthly by the University of Michigan. It uses an ongoing, nationally representative survey based on telephonic household interviews to gather information on consumer expectations regarding the overall economy.
Given the potential for sampling biases of individual survey reports, researchers and investors try sometimes to average the values of different index reports into a single aggregated measure of consumer confidence.
Related Research Articles
In economics, a recession is a business cycle contraction that occurs when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending. This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock, the bursting of an economic bubble, or a large-scale anthropogenic or natural disaster.
In economics, inflation is a general increase in the prices of goods and services in an economy. This is usually measured using the consumer price index (CPI). When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money. The opposite of CPI inflation is deflation, a decrease in the general price level of goods and services. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index. As prices faced by households do not all increase at the same rate, the consumer price index (CPI) is often used for this purpose.
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. Inflation reduces the value of currency over time, but deflation increases it. This allows more goods and services to be bought than before with the same amount of currency. Deflation is distinct from disinflation, a slowdown in the inflation rate; i.e., when inflation declines to a lower rate but is still positive.
An economic indicator is a statistic about an economic activity. Economic indicators allow analysis of economic performance and predictions of future performance. One application of economic indicators is the study of business cycles. Economic indicators include various indices, earnings reports, and economic summaries: for example, the unemployment rate, quits rate, housing starts, consumer price index, Inverted yield curve, consumer leverage ratio, industrial production, bankruptcies, gross domestic product, broadband internet penetration, retail sales, price index, and changes in credit conditions.
A consumer price index (CPI) is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time. The CPI is calculated by using a representative basket of goods and services. The basket is updated periodically to reflect changes in consumer spending habits. The prices of the goods and services in the basket are collected monthly from a sample of retail and service establishments. The prices are then adjusted for changes in quality or features. Changes in the CPI can be used to track inflation over time and to compare inflation rates between different countries. The CPI is not a perfect measure of inflation or the cost of living, but it is a useful tool for tracking these economic indicators.
Consumer spending is the total money spent on final goods and services by individuals and households.
Consumer confidence is an economic indicator that measures the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. If the consumer has confidence in the immediate and near future economy and his/her personal finance, then the consumer will spend more than save.
The Conference Board, Inc. is a 501(c)(3) non-profit business membership and research group organization. It counts over 1,000 public and private corporations and other organizations as members, encompassing 60 countries. The Conference Board convenes conferences and peer-learning groups, conducts economic and business management research, and publishes several widely tracked economic indicators.
The University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample. Fifty core questions are asked.
Purchasing managers' indexes (PMI) are economic indicators derived from monthly surveys of private sector companies.
The Conference Board Leading Economic Index is an American economic leading indicator intended to forecast future economic activity. It is calculated by The Conference Board, a non-governmental organization, which determines the value of the index from the values of ten key variables. These variables have historically turned downward before a recession and upward before an expansion. The per cent change year over year of the Leading Economic Index is a lagging indicator of the market directions.
The United States Consumer Price Index (CPI) is a family of various consumer price indices published monthly by the United States Bureau of Labor Statistics (BLS). The most commonly used indices are the CPI-U and the CPI-W, though many alternative versions exist for different uses. For example, the CPI-U is the most popularly cited measure of consumer inflation in the United States, while the CPI-W is used to index Social Security benefit payments.
See Business Cycle.
The Canadian Index of Consumer Confidence (ICC) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending. In Canada consumer confidence is issued monthly by The Conference Board of Canada, an independent research organization, and is based telephone survey of 2,000 households.
Consumer confidence is a key driver of economic growth and is widely considered a leading economic indicator of household spending on consumption. Consumers tend to increase consumption when they feel confident about the current and future economic situation of the country and their own financial conditions. In economies such as India and the US, where personal consumption accounts for more than 60% and 70% of gross domestic product respectively, consumer confidence has a particularly significant impact on the economy. Measuring it can provide critical insight into the economy's growth prospects. Consumer sentiment indices are essential tools used by global investors and will be an immense aid to individual and institutional investors in India.
Vietnam Consumer Confidence Index is an indicator designed to measure consumer confidence of Vietnam, which is defined as the degree of optimism on their activities of savings and spending.
George Katona was a Hungarian-born American psychologist who was one of the first to advocate a rapprochement between economics and psychology.
The Employee Confidence Index is a measure of employees’ overall confidence in the economy, their employer, and their ability to find other employment. The Index, like other employee confidence studies, is designed to show how the supply and demand of labour in various industries effects employee confidence and satisfaction. Currently, the Employee Confidence Index is only published in the United States using data collected from American citizens.
The ISM Report On Business (ROB), also known as the ISM Report, is the collective name for two monthly reports, the Manufacturing ISM Report On Business and the Non-Manufacturing ISM Report On Business, published by Institute for Supply Management. The ROB is based on a national survey of purchasing managers tracking changes in the manufacturing and non-manufacturing sectors. It is considered to be one of the most reliable economic barometers of the U.S. economy and gives an important early look at the health of the nation's economy. In addition to being market moving, the ROB makes an important contribution to the American statistical system and to economic policy. It also has one of the shortest reporting lags of any macroeconomic series.
The Joint Harmonised EU Programme of Business and Consumer Surveys consists of economic tendency surveys which are conducted in all EU Member States and candidate countries. Based on the results of the surveys, a set of harmonized economic indicators is calculated for all participating countries, typically used for analysis and short-term forecasting of economic developments, as well as economic research. Furthermore, the indicators lend themselves to detecting turning points in the business cycle and are a complement to official statistical data on economic developments, which are released with a significantly longer time-lag .
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