Consumer confidence index

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. 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]

In the United States consumer confidence 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.

The consumer confidence index was started in 1967 and is benchmarked to 1985=100. This year was chosen because it was neither a peak nor a trough. The Index is calculated each month 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 for Social Research.

Calculation

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.

Each month The Conference Board surveys 5,000 US households. The survey consists of five questions that ask the respondents' opinions about the following:[2]

  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 preliminary results from the consumer confidence survey are released on the last Tuesday of each month at 10am EST.

Once the data have 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. 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 are calculated for the United States as a whole and for each of the country's nine census regions.

Usage

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-demand surveys versus consumer-confidence and -sentiment surveys

Consumer-demand surveys are interview-based statistical surveys that measure the percentage of households that will buy a car, white goods, PCs, TVs, home furnishings, kitchenware or toys in, for example, the next three-month period. The surveys provide a percentage of those who will purchase more, less or the same amount of food and clothing in the next three months than in the corresponding period the year before. If you ask people about their purchasing behavior within the coming six or 12 months, there will be more of those who “hope to be able to buy”, than if consumers are asked about what they will purchase in the next three months. The shorter the time spans, the closer to actual behavior.

Consumer-confidence and -sentiment surveys measure how people are doing financially, how they look at the overall economy of the country or business conditions in the country, if they think that the government is doing a good or a poor job and if people think that it is a good or a bad time to buy a car or to buy or sell a house.

When the business cycle is fairly stable, consumer demand surveys and consumer confidence and sentiment indices will often correlate closely and indicate the same direction of the economy, but in times with a high degree of economic or political uncertainty or during a prolonged crisis, the two types of consumer surveys might differ significantly. In 2011 the confidence and sentiment surveys went up from March to April, while consumer demand surveys dropped significantly. In August 2011 the confidence and sentiment surveys dropped significantly and stayed low during September and October, while consumer demand surveys showed resilience, a development confirmed later by official statistics.

Thomson Reuters/University of Michigan and the Conference Board both publish a monthly consumer confidence and attitude survey. The Institute for Business Cycle Analysis publishes a monthly consumer demand survey known as US Consumer Demand Indices.

In the United States

US consumer confidence index 1966–2012

The Conference Board's consumer confidence index is the most widely accepted index among the United States media, businesspeople, and many consumers. The chart to the left shows the index over time from December 1966 to April 2012.

Other measures of consumer confidence in the United States

In addition to the Conference Board's CCI, other survey-based indices attempt to track consumer confidence in the U.S.:

[3]

Given the potential for sampling biases of individual survey reports, researchers and investors try sometimes to average the values of different index reports into a single aggregated measure of consumer confidence.

In India

The ZyFin India Consumer Outlook Index[4] is a monthly index of consumer sentiment in India. The COI is designed to provide reliable insights into the direction of the Indian national and regional economies. Released once a month, the index is computed from the results of a monthly survey of 4,000 consumers in 18 cities across India.

In the Republic of Ireland

KBC Bank Ireland (formerly IIB Bank) and the Economic and Social Research Institute (a think-tank) have published a monthly consumer sentiment index since January 1996.[5]

In Canada

The Conference Board of Canada's index of consumer confidence has been ongoing since 1980. It is constructed from responses to four attitudinal questions posed to a random sample of Canadian households. Those surveyed are asked to give their views about their households' current and expected financial positions and the short-term employment outlook. They are also asked to assess whether now is a good or a bad time to make a major purchase such as a house, car or other big-ticket items.

Consumer confidence index in Indonesia

Consumer Survey-Bank Indonesia (CS-BI) is a monthly survey that has been conducted since October 1999 by Bank Indonesia.[6] The survey represents the consumer confidence about the overall economic condition, general price level, household income, and consumption plans three and six months ahead. Since January 2007, the survey is conducted with approximately 4,600 household respondents (stratified random sampling) in 18 cities: Jakarta, Bandung, Semarang, Surabaya, Medan, Makassar, Bandar Lampung, Palembang, Banjarmasin, Padang, Pontianak, Samarinda, Manado, Denpasar, Mataram, Pangkal Pinang, Ambon, and Banten. At a significance level of 99%, the survey has a sampling error of 2%. Data canvassing run through interviews by phone and direct visits in particular cities that is based on rotational system. The Balance Score Method (net balance + 100) has been adopted to construct the index, where the index above 100 points indicates optimism (positive responses) and vice versa. The consumer confidence index (CCI), is an average of the current economic condition index (CECI) and consumer expectation index (CEI).

The CECI is made up of the average of current condition of several factors compared to six months ago

  1. Household income
  2. Right time to buy durable goods
  3. Unemployment

The CEI is made up from the average of future prospects of several factors

  1. Household income
  2. Overall economic condition
  3. Unemployment rate.

Other sources

Danareksa conducts a monthly consumer survey to produce the Consumer Confidence Index. [7]

References

  1. ↑ Benjamin, Colin (30 October 2008). "Consumer Confidence - Global Monitor of Consumer Sentiment Index Reports and Country Update on Consumer Confidence Changes". Marshall Place Associates. Retrieved 2009-02-24.
  2. ↑ "Consumer Confidence: An Online NewsHour Special Report". The NewsHour with Jim Lehrer. PBS. May 2001. Retrieved 2009-02-24.
  3. ↑ "Washington Post-ABC News Consumer Comfort Index Survey". The Washington Post Company. Retrieved 2009-02-24.
  4. ↑ ZyFin India Consumer Outlook Index
  5. ↑ "Consumer Sentiment". Economic and Social Research Institute. Retrieved 2009-02-24.
  6. ↑ Nurcahyo Heru Prasetyo, Ririn Yuliatiningsih. "BANK INDONESIA - CONSUMER SURVEY" (PDF). Bank Indonesia. Retrieved 2011-02-26.
  7. ↑ Danareksa, Research Institute. "Consumer Confidence Index". Danareksa. Retrieved 26 February 2011.
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