As you become more familiar with the investing world. you start to hear about things like the “TED Spread”, the “Non-Farms Payroll Report”, or the “Consumer Confidence Index”. You may wonder what these market indicators are and why they might be important to your investment decisions. Today we focus on the Consumer Confidence Index (CCI) and provide some context to the role this indicator plays in helping investors make sense of market conditions and trends.

The Consumer Confidence Index

The Consumer Confidence Index is a measure of US consumer attitudes. It is a monthly measure published by The Conference Board, an independent business membership and research association whose mission is to supply global organizations with practical information to aid their business performance. The measure is calculated based on information from monthly consumer surveys provided by the Nielson Company. Currently CCI data goes back to 1985, which is given a benchmark value of 100. Every subsequent measure is indexed to that benchmark – so for example, the May 2011 Confidence Index had a value of 60.8, down from 66.0 in April. The Index was last over 100 in the fall of 2007, before the crippling 2008 recession.

Why Does It Matter?

Consumer activity accounts for about 70% of US Gross Domestic Product (GDP), with business investment, government spending and net exports collectively making up the other 30%. In other words, our economy to a large extent runs on the decisions households make every week about how much they can afford to spend on groceries, clothes or that trendy eco-friendly front-loading washing machine they’ve been eying. How US consumers feel about their current economic situation and the near-term prospects are extremely important for investors who seek to make sense of likely economic trends. If consumers are opening their wallets, then businesses around the world are ramping up production to feed more electronic gadgets, auto parts and children’s toys into their supply chains. That in turn, affects commodities prices, currency rates, and other indicators whose movements will have a direct impact on the performance of the assets in your portfolios.

Looking Forward, Looking Backwards

Economic indicators tend to be lumped into one of two categories: leading or lagging. For example, stock market indexes are normally viewed as leading indicators because investors are essentially making bets on what they see happening in the coming days, weeks or months. Unemployment, on the other hand, is a lagging indicator. Businesses tend to make new hiring decisions only after an economic recovery has been underway long enough for them to feel confident about increasing the payroll. In this regard, the Consumer Confidence Index is a bit of a hybrid. In fact, the index consists of two sub-parts: the Expectations Index and the Present Situation index. These contribute approximately 60% and 40% respectively of the total measure. In effect, the CCI is a reflection both of how consumers feel today and how they see things shaping up in the next six months. For May 2011, the Expectations Index was 75.2, down from 83.2 the month before, and the Present Situation Index was at 39.3, down just slightly from the previous month’s 40.2.

Decision-makers like to drill down to this level of detail when analyzing economic indicators and considering their alternative investment or business decisions. It’s a sure bet that around the world many people are studying the Conference Board’s May 31 release, in many different languages, and making decisions that will be affecting your investments in the coming months.

Post a comment and share your thoughts on the Consumer Confidence Index or other economic indicators.

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