Consumer Confidence Index

The US Consumer Confidence Index (CCI) is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending. It is issued monthly by The Conference Board, an independent economic research organization, and is based on 5,000 households. Such measurement is indicative of consumption component level of the gross domestic product. The Federal Reserve looks at the CCI when determining interest rate changes, and it also affects stock market prices.

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.[1]

The index started in 1985 at 100 and is normalized based on the Consumer Confidence level when it began. The Conference Board declares a recession whenever there are two or more consecutive quarters with confidence levels below 100. In that year the result of the index was arbitrarily set to 100, representing the index’s benchmark. This value is adjusted monthly 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”.

Another well-established index that measures consumer confidence is the University of Michigan Consumer Sentiment Index, run by University of Michigan's Institute of Social Research.

Calculation
In the most simplistic terms, when their confidence is trending up, consumers spend money, indicating a healthy economy. When confidence is trending down, consumers are saving more than they are spending, indicating the economy is in trouble. The idea is that the more confident people feel about the stability of their incomes, the more likely they are to make purchases. Each month The Conference Board surveys 5,000 U.S. households. The survey consists of five questions that ask the respondents’ opinions about the following:
 * 1) Current business conditions
 * 2) Business conditions for the next six months
 * 3) Current employment conditions
 * 4) Employment conditions for the next six months
 * 5) Total family income for the next six months

Survey participants are asked to answer each question as “positive”, “negative” or “neutral". The results from the Consumer Confidence Survey are released on the last Tuesday of each month at 10am EST. Once the data has 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, which is set as the benchmark because 1985 is the first year the index was calculated. 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 is calculated for the United States as a whole and for each of the country’s nine census regions.

How it is used
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 and/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 Confidence Index in the United States
The Conference Board Consumer Confidence Index is the most widely accepted index among the United States media, businesspeople, and many consumers. Note: The time line on this graph reads right to left with the 2007 data on the far left and the 1997 data on the far right.