Consumer Confidence Index(CCI)

Consumer Confidence Index(CCI)

Consumer confidence is a catch-all phrase for the opinions and attitudes of consumers about the current and future strength of the economy. A psychological concept, consumer confidence is difficult to measure. Consumer confidence measures how optimistic (or pessimistic) consumers are about the state of the economy. Put simply, consumer confidence gives economists a window into how people are feeling about the economy. This is generally expressed in how they save and how they spend their money. The more they spend, the more confident they are about the direction and state of the economy. If people save more, though, it generally means they aren’t feeling as optimistic. The CCI is based on the premise that if consumers are optimistic, they will spend more and stimulate the economy, but if they are pessimistic then their spending patterns could lead to an economic slowdown or recession.

Consumer confidence index takes values between 0 and 200. Values above 100 units in the consumer confidence index indicate that the consumer interprets the course of the country’s economy positively and expects the economy to grow. Values below 100 units indicate that the consumer has a negative expectation in the economy and they expect a shrinkage or worsening in the economy. After the surveys are conducted, the responses are aggregated into a single number, called an “index” of consumer confidence. Variation in this index is meant to measure variation in overall consumer confidence.

Every month, the two primary measures of U.S. consumer confidence, the University of Michigan’s Index of Consumer Sentiment and the Conference Board’s Consumer Confidence Index, are released with much media fanfare. The attention these indexes receive often centers on the potential information they contain regarding current and future economic conditions. That is, changes in the indexes are often described as foreshadowing changes in economic conditions more broadly. This article discusses what these indexes measure and why they receive so much attention, and also investigates whether the facts justify the interest.

Why Does Consumer Confidence Receive So Much Attention?

A primary reason why people pay attention to consumer confidence indexes is because they are thought to provide an early signal regarding the strength of the broad economy. There are at least two reasons why this might be the case.

First, as is suggested by the figure, consumer confidence is correlated with current economic conditions. This might be because consumers accurately portray current economic conditions with their answers to the survey questions. It might also be if the way consumers feel about the economy and their personal financial situation affects their willingness to spend. Here, consumer confidence would be a causal force for the economy.

The second reason why consumer confidence might provide useful early information is if consumers’ responses to the survey questions provide good forecasts of future economic activity. This would occur if consumer confidence has a causal influence on economic activity, but this influence takes several months before it is fully realized. It might also be that consumers are good at forecasting the economy. Consumer confidence serves as a convenient summary of the forecasts of many individuals based on a variety of different information. To the extent that these forecasts are useful for predicting economic activity, indexes of consumer confidence will be an important leading indicator of the economy’s strength.

The University of Michigan’s Survey Questions

We are interested in how people are getting along financially these days. Would you say that you (and your family living there) are better off or worse off financially than you were a year ago?
Now looking ahead—do you think that a year from now you (and your family living there) will be better off financially, or worse off, or just about the same as now?
Now turning to business conditions in the country as a whole—do you think that during the next 12 months we’ll have good times financially, or bad times, or what?
Looking ahead, which would you say is more likely—that in the country as a whole we’ll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?
About the big things people buy for their homes—such as furniture, a refrigerator, stove, television, and things like that. Generally speaking, do you think now is a good or bad time for people to buy major household items?