Indicator 2 – Consumer Confidence Index (CCI)

9 Jun


Perhaps I should have begun the series with this indicator.  The health of the economy is determined as much (if not more so) by psychology as it is by production numbers.  As a psychological concept; however, consumer confidence can be difficult to measure. (Note to self – post articles on psychology and markets).

The U.S. Consumer Confidence Index (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.  In the United States consumer confidence is issued monthly by The Conference Board, an independent economic research organization, and is based on survey responses by 5,000 households.  Opinions on current conditions make up 40% of the index, with expectations of future conditions comprising the remaining 60%.  The survey consists of five questions that ask the respondents’ opinions about the following:

  • Current business conditions
  • Business conditions for the next six months
  • Current employment conditions
  • Employment conditions for the next six months
  • Total income for the next six months

Such measurement is indicative of the consumption component level (or 70%) of the gross domestic product.  The Consumer Confidence Index was started in 1967 and is bench-marked to 1985 = 100. This year was chosen because it was neither a peak nor a trough.

In simple terms, increased consumer confidence indicates economic growth in which consumers are spending money, indicating higher consumption.  Decreasing consumer confidence implies slowing economic growth, and so consumers are likely to decrease their spending.  The idea is that the more confident people feel about the economy and their jobs and incomes, the more likely they are to make purchases.  Declining consumer confidence is a sign of slowing economic growth and may indicate that the economy is headed into trouble.  The Federal Reserve looks at the CCI when determining interest rate changes.

In general, the CCI is considered a lagging indicator, which means it follows economic trends.  It lags because most people do not really feel that the economy has changed until after the fact.

But what about using consumer confidence as a predictor of future economic activity and strength?  Several economists tested whether the value of the index from a month, say, January, was able to improve projections of February’s consumption growth.  They concluded that when consumer confidence is used as the only variable, it can significantly improve these forecasts.  However; consumer confidence is not data with long-term forecasting powers.

The CCI for May 2012 stands at 64.9 – down from a revised 68.7 in April 2012.  The May figure, which represents the biggest drop since October 2011 when the measure fell about 6 points, shows that consumers need more encouraging news before their concerns about the economy start to dissipate. Despite easing gas prices, Americans continue to be concerned about a disappointing job market, declining home values, big drops in the stock market and a worsening European economy that they fear will negatively impact the U.S.   May’s figure is significantly below the 90 reading that indicates a healthy economy. The measure hasn’t been near that level since December 2007. But the latest reading is still well above the 40 figure reached last October and the all-time low of 25.3 in February 2009.

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