Consumer Confidence

Importance: *

Definition:

The Consumer Confidence Survey measures the level of confidence individual households have in the

performance of the economy. Survey questionnaires are mailed to a nationwide representative sample

of 5,000 households, of which approximately 3,500 respond. Households are asked five questions that

include (1) a rating of business conditions in the household�s area, (2) a rating of business conditions in

six months, (3) job availability in the area, (4) job availability in six months, and (5) family income in six

months. The responses are seasonally adjusted. An index is constructed for each response and then a

composite index is fashioned based on the responses. Two other indexes, one for an assessment of the

present situation and one for expectations about the future, are also constructed. Expectations account

for 60% of the index, while the current situation is responsible for the remaining 40%. In addition,

indexes for the present and future economic situations are calculated for each of the nine Census

divisions. In the base year, 1985, the value of the index was 100.

The Conference Board also tracks consumer buying plans for the next six months. Among the items

tracked are automobiles, homes, vacations, and major appliances. If the economy experiences a

long-term expansion, buying intentions may decline even while the jobless rate declines because of the

satisfaction of pent-up demand. Conversely, if inflation begins to accelerate, spending plans may

increase for the short-term as consumers buy now to avoid having to pay higher prices later.

Consumer confidence correlates closely with joblessness, inflation, and real incomes. The growth of

help wanted advertising as measured by the Conference Board has also been a strong contributor to

consumer confidence. Rising stock market prices can also boost consumer confidence.

Related Indicators: Consumer confidence is important because Consumption spending represents about 56% of the GDP and is divided into three categories: durable goods (items expected to last more than three years), nondurable goods (food and clothing), and services. Other related concepts are those of Personal Consumption Expenditures and Retail Sales that are published monthly rather than quarterly.

Frequency: Data is collected during the first eighteen days of the month for release on the last Tuesday of the month.

Availability: Each month�s data is revised the following month based on a more complete survey response. This is the only revision, although seasonal factors are updated periodically.

Direction: Procyclical

Timing: Leading indicator of the business cycle

Volatility: Moderate

Likely Impact on Financial Markets: Low. Financial markets interpret rising consumer confidence as a precursor to

higher consumer spending. Higher consumer spending could in turn is expected to spark accelerated inflation.

Interest Rates: Financial markets interpret rising consumer confidence as a precursor to

higher consumer spending. Higher consumer spending could in turn is expected to spark accelerated inflation.

Stock Prices: Ambiguous

Exchange Rates: Small

Ability to affect markets: moderate unless there is a large unexpected change.

Analysis of the indicator:

Strenghts:

Data for a month is released during that month.

Consumer confidence is a leading indicator for the business cycle.

Release provides information on consumer assessments of the present situation and

expectations for the future.

Improved expectations for the future indicate that consumers will be more willing to spend now