Consumer confidence is an economic indicator used by economists to measure how optimistic, pessimistic or neutral consumers feel about both the state of their country’s economy and their own personal financial situation. A consumer is a person or economic entity that buys something and does not sell it on – they are the end users.
Apart from academics and economists, consumer confidence is closely monitored by banks, retailers, manufacturers, builders, investors and government agencies – it is a measure that strongly influences their planning.
What is a consumer? A consumer is a person who purchases goods and services for personal use, and not for resale or manufacture. A consumer is an individual who can make the decision whether or not to buy something at a store, or to pay for a service.
How confident consumers feel about the stability or reliability of their incomes and jobs affects economic decisions, such as spending activity. Hence, consumer confidence serves as one of the major indicators for the overall state of a nation’s economy.
High consumer confidence leads to stronger domestic demand
If consumer confidence is high, people will generally be buying more goods and services – they will be spending more. However, if it is low, the tendency will be to spend less and save more, i.e. domestic demand will drop or remain low.
A month-to-month pattern in consumer confidence reflects how individuals perceive their ability to retain and/or find good jobs. This is directly linked to how they rate the current state of the economy and their personal financial situation.
When an economy expands, consumer confidence tends to increase. Conversely, when the economy shrinks consumer confidence drops.
Sometimes, however, GDP (gross domestic product) may be expanding while consumer confidence declines, as may occur when interest rates are raised to stop the economy from overheating. If interest rates go up, so do mortgage and bank loan rates, resulting in less disposable income for many people.
Economists say that consumers do not always have access to the most up-to-date data on the situation of the economy. In the US, some studies have suggested that the consumer confidence index is a lagging indicator of stock market performance.
Businesses and the government plan according to consumer confidence
If consumer confidence is falling, or is expected to decline, manufacturers, for example, will reduce their inventory of certain goods in advance, usually the more expensive and durable ones. They may also postpone investment plans.
If banks expect consumers to spend less, they will prepare for a reduction in mortgage and personal loan applications, as well as credit card usage. Lower mortgage activity will mean less demand for construction, hence, builders also monitor consumer confidence closely.
If the government expects consumer spending to fall, it will prepare for a reduction in future tax revenues.
On the other hand, if consumer confidence is rising, manufacturers, banks, builders and the government will prepare. Manufacturers will increase production, inventories and investment. Larger companies may increase hiring rates. Builders will prepare for higher construction rates, and government agencies will prepare for greater tax revenues.
Who provides consumer confidence data?
United States: the non-profit business group – The Conference Board – has been publishing the Consumer Confidence Index (CCI) every month since 1967. It is designed to assess the overall confidence, relative financial health and spending power of the average American consumer. It also publishes the Present Situation Index and the Expectations Index.
Thomson Reuters publishes the Michigan Consumer Sentiment Index (MCSI), which is produced by the University of Michigan.
United Kingdom: the GfK NOP Consumer Confidence Barometer has been published every month since 1995. Based in Germany, GfK Group SE is the fourth biggest market research organization in the world. The company has been providing similar data across Europe for several decades.
Canada: the Conference Board of Canada has been publishing its Index of Consumer Confidence since 1980.
According to Cambridge Dictionaries Online, consumer confidence is:
“The degree to which people feel confident about how well the economy is doing, which influences how much money they are willing to spend.”
Consumer confidence should not be confused with the CPI (consumer price index), which measures prices changes of consumer goods and services.
Video – The Consumer Confidence Index