What is Consumer Confidence?
Consumer spending represents 70% of the United States GDP (gross domestic product) and fuels most developed service-based economies.
Measuring consumer spending is straightforward, however, due to the scattered human nature of consumers, predicting the future spending habits of consumers is much more difficult.
Economists resolved this challenge by developing the Consumer Confidence Index, which is a list of surveys and questions for consumers.
Consumer confidence is an economic indicator used to measure how confident or not consumers are about the overall state of the economy, as well as their own personal financial stability.
The CCI (consumer confidence index) is helpful because consumers’ confidence impacts their economic decisions and spending habits which ultimately, shape an entire country’s economy.
All in all, when consumers are confident about their futures, they tend to spend more, and spending more stimulates the growth of the economy.
How is Consumer Confidence Measured?
There are various consumer confidence surveys floating around the globe, but most of them function similarly.
The surveys ask a random sample of individuals questions which ultimately construct the consumer’s current and future perspectives on their finances, as well as the state of the overall economy.
Typically, the question includes insight to:
- Current Business Conditions
- Business Conditions Over the Next 6-12 Months
- Current Employment Conditions
- Employment Conditions Over the Next 6-12 Months
- Total Family Income Over the Next 6-12 Months
Consumers are asked to answer each question as “positive”, “negative” or “neutral”, and in turn, are respectfully scored as “1”, “-1” and “0”.
When these amounts are added up, they calculate what is known as a “relative value”. This value is compared to the Index Value that comes from the CCI and is often created when the first surveys began, decades ago.
Finally, these values are averaged to produce an accumulated amount that is reported for each given country.
Why is Consumer Confidence Important?
Consumer confidence is important because it contributes to the economy, whether it is good or bad.
Consumer confidence gives economists insight into consumer spending habits, their overall outlook on finances, and what they think of the future of the economy, all of which affect the economy as a whole.
How Does Consumer Confidence Affect the Economy?
Due to its ability to predict consumer spending patterns, consumer confidence data is a crucial indicator for businesses and investors.
Consumer spending habits can be useful predictors for GDP growth, as well as the effectiveness of monetary policies and inflation.
Consumer assessments, research studies, and other insights are used by investors, manufacturers, retailers, banks, governmental agencies and more, in order for these businesses to better plan for current and future actions.
For instance, a weaker consumer confidence score predicts a decline in consumer spending, therefore, businesses could be proactive by decreasing their inventories beforehand, delaying investments on new projects or facilities, or preparing for a reduction in lending activities.
However, if consumer confidence is increasing, businesses could boost their production and inventories, plan to increase hiring rates, or start preparing for higher housing construction rates.
Common Uses for Consumer Confidence:
Leading Indicator: Consumer confidence scores can be used as a leading indicator for an extensive economic turnaround.
Policy Effectiveness: Consumer confidence can be used to measure the effectiveness of policies used by regulators in order to kickstart economic growth.
Luxury & Retail Sectors: The retail and luxury goods industries rely on consumer confidence throughout the economy because their revenues are correlated with leisure spending patterns.
At Kasi Insight, we’re always dedicated to using the resources which allow us to better understand the market(s) that we are studying.
Consumer confidence is a measure that affects every country’s economy and while it affects some countries more than others, it is still a helpful tool to observing markets all over the world.