The consumer confidence index measures public sentiment on the economy, jobs, and income. Economists look at consumer confidence to gauge future spending in the economy. If confidence is up, people feel safer and more secure with the economy, and therefore are more willing to spend money, and borrow money.
If confidence is down, people tend to get more nervous about the economy, causing them to spend less and save more.
The consumer confidence index is calculated from the responses to a survey that is sent to 5000 people. The survey asks the respondents 5 questions regarding their opinions on :
Current business conditions.
Business conditions for the next 6 months
Current employment conditions
Employment conditions for the next 6 months.
Total family income for the next 6 months.
It is important to note that there are 2 questions asking present conditions, and 3 questions asking future conditions to weight the index 60:40 future to present.
For each question, the respondents are asked to choose positive, negative or neutral.
Something called the relative value is then calculated out for each question by taking the total number of positive answers and dividing it by the total number of positive answers and negative answers added together.
The relative value is then compared to the relative value from the same month in 1985 for the same category.
An index number is calculated that is a percent of what the Index value was for the same month in 1985. For instance, if the index number is 70, then confidence level for that month is at a level that is 70% of what the confidence level was in 1985.
The year 1985 was chosen because the economy was close to the middle of the business cycle.
The index numbers for all 5 questions are then averaged together to form the Consumer Confidence Index.
In addition, the index numbers from 2 questions asking the respondents opinion on the current conditions of business and employment are averaged together to form the “Present Situation Index,” and the index numbers from the three questions asking about the future conditions of business, employment, and income for the next 6 months are averaged together to form the “Expectations Index.”
So they average the numbers for all the questions to show the total confidence, they average just the questions pertaining to the present conditions to see how people feel things are right now, and they average just the questions pertaining to future conditions to see how people feel things will be in a few months. In other words, they look at how are things overall, how are things right now, and in 6 months, do people think things will be better or worse?
The report itself is very short. The report provides the Consumer confidence Index number, along with a brief summary with opinion on what caused the change in value. There is also a small graph showing the Index numbers for the last 9 months to show the overall trend of sentiment.
Single month reports usually have little impact on the markets unless the index numbers have changed a significant amount. However, long term trends in one direction can show the direction the economy is heading.
If the trend is up, it means that spending in the economy should increase, which would create jobs and increase income. However, it might also lead to inflation causing the Fed to increase interest rates.
If the trend is down, it means that spending should decrease, and savings increase, which would cause unemployment to increase. This might lead to the Fed lowering interest rates or the Gov reducing taxes in an effort to try and increase spending.
So that’s the Consumer Confidence Index- a report economists use to gauge consumer sentiment, and in turn future spending in the economy.