Econ Grapher

Consumer Confidence

What is Consumer Confidence?
Consumer confidence indexes measure the relative levels of optimism and pessimism amongst consumers about their current situation and future expectations. They are based on surveys of a random sample of consumers who are asked a range of set questions on things such as their employment situation, financial position, whether they think the economy will improve or that jobs will increase, whether they expect to spend more, if they think it's a good time to make a major purchase, etc. The questions and calculation methodology will vary by index (see a partial listing in the references section below). In the US there are a couple of indexes, the most watched are the Conference Board consumer confidence index, and the Reuters University of Michigan consumer sentiment index, there's also the Washington-ABC News consumer comfort index.

How does it relate to Markets?
Consumer confidence is considered a lagging indicator by most, but it is generally higher frequency so consumer confidence will offer a good insight into how consumer spending is tracking (confirmation of other data). Consumer confidence and retail sales tend to track quite closely. So big changes in the index will impact on markets due to the implications for the economic outlook. Particularly since part of the consumer confidence index is future expectations. Higher levels of consumer confidence are characteristic of economic expansion, while lower levels are symptomatic of recession and generally bad conditions. Because consumers tend to buy more stuff when confidence is high a strong result is usually good for markets, especially if the result is greater than expected (however the expectations aspect of it is important, e.g. if current situations was at an all time high, but future expectations started to drop-off, markets would probably react by pricing in a chance of recession).  

Present Situation vs Future Expectation
As noted there is a distinction between present situations and future expectations. This is particularly informative to drill into in gauging (along with other information) how people see things unfolding, and thus how they might make their economic decisions. For the most part future and present tend to track fairly similarly in directions (obviously future expectations tend to be highly influenced by current situations e.g. home ownership and job related aspects). The index will also track closely to changes in house prices and employment, as these are key determinants of consumer wealth and income. So consumer confidence indexes are an important and useful data point to consider as part of wider economic analysis.

Sources and further reading:
Understanding The Consumer Confidence Index
Emerging Markets Consumer Confidence
The Conference Board - US Consumer Confidence
The Conference Board of Canada
The Economic and Social Research Institute - Ireland Consumer Confidence
Roy Morgan - Consumer Confidence - Australia & New Zealand

Graph Library:
Metric - Consumer Confidence

Original Source: http://www.econgrapher.com/encyclopedia-consumerconfidence.html

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