Consumer confidence index

Based on Wikipedia: Consumer confidence index

The Number That Predicts Your Neighbor's Next Purchase

Every month, five thousand American households receive an unusual phone call. Researchers ask them five simple questions: How do you feel about business conditions right now? How about six months from now? Is finding a job easy or hard? Will it be easier or harder next year? And finally, do you expect your family's income to rise or fall?

From these conversations emerges a single number that moves markets, influences Federal Reserve decisions on interest rates, and helps predict whether the economy is headed for boom or bust. It's called the Consumer Confidence Index, or CCI, and it's built on something surprisingly simple: asking people how they feel.

Why Feelings Matter More Than You'd Think

Here's the core insight behind consumer confidence: economies are, in large part, self-fulfilling prophecies.

When people feel optimistic about their jobs and incomes, they spend money. They buy cars, refrigerators, and houses. That spending becomes someone else's revenue. Businesses hire more workers. Those workers feel confident and spend more. The cycle feeds itself.

The reverse is equally true. When people worry about layoffs or stagnant wages, they pull back. They skip the new car and repair the old one. They postpone the kitchen renovation. Businesses see falling sales and start cutting costs, often by reducing their workforce. Those layoffs make everyone else more nervous, and spending falls further.

Consumer spending accounts for roughly seventy percent of the American economy. So when economists want to know where the economy is heading, they don't just look at what people are buying today. They ask what people plan to buy tomorrow. And that depends enormously on how they feel.

The Birth of a Barometer

The Conference Board, an independent research organization based in New York, started measuring consumer confidence in 1967. They chose 1985 as their baseline year, setting that year's confidence level at 100. Everything since has been measured against that benchmark.

When the index reads 120, consumers feel about twenty percent more optimistic than they did in 1985. When it drops to 80, they're considerably more pessimistic. The index has swung from below 40 during deep recessions to above 140 during boom times.

The five survey questions split into two categories. Two questions ask about the present: current business conditions and current job availability. These form what's called the Present Situation Index. The other three questions look ahead: future business conditions, future employment, and expected family income. These create the Expectations Index.

Interestingly, the forward-looking questions carry more weight. The Expectations Index accounts for sixty percent of the overall number, while the Present Situation Index makes up only forty percent. This design reflects the index's purpose as a leading indicator, a signal of where the economy is heading rather than where it's been.

Who's Watching and Why It Matters

The results drop on the last Tuesday of each month at ten in the morning Eastern time. In the minutes that follow, traders adjust their positions, analysts revise their forecasts, and journalists craft headlines.

But the audience extends far beyond Wall Street.

Manufacturers watch the index to decide how much inventory to stock. A falling trend suggests consumers will avoid big purchases, especially anything requiring financing. Why build cars that will sit unsold on lots? Better to slow production and preserve cash.

Banks track the index to anticipate demand for credit. Rising confidence typically means more mortgage applications, more auto loans, more credit card activity. Falling confidence signals the opposite, a good time to tighten lending standards before defaults rise.

Retailers study the data to plan their seasonal orders. Should they stock up aggressively for the holiday season, or hedge their bets with lighter inventory?

Government officials use the index to time their interventions. When confidence craters, politicians face pressure to act, whether through tax rebates, infrastructure spending, or other stimulus measures. Rising confidence gives them breathing room.

The Federal Reserve, which sets the interest rates that ripple through the entire economy, monitors consumer confidence alongside dozens of other indicators. A sudden drop in confidence might argue against raising rates, even if inflation appears concerning.

The Five Percent Rule

Not every wiggle in the index matters. Economists generally dismiss movements of less than five percent as statistical noise, the kind of fluctuation that happens when you're surveying a sample of households rather than the entire population.

But when the index moves five percent or more, analysts pay attention. Such swings often signal a genuine shift in the economy's direction. A sustained decline over several months is particularly concerning, suggesting the optimism that fuels spending is draining away.

Confidence Versus Demand: A Crucial Distinction

There's an important difference between asking people how they feel about the economy and asking what they actually plan to buy.

Consumer confidence surveys measure sentiment, an emotional and psychological state. Consumer demand surveys ask concrete questions: Will you buy a car in the next three months? A television? A washing machine?

Most of the time, these two types of surveys move in the same direction. Happy people buy things; worried people don't.

But during periods of political turmoil or prolonged economic uncertainty, the two can diverge dramatically. In 2011, something curious happened. From March to April, confidence and sentiment surveys rose, but consumer demand surveys dropped. People said they felt better about the economy, yet they were planning to buy less.

Then in August of that year, confidence surveys plummeted following the debt ceiling crisis and remained low through October. But consumer demand surveys showed resilience. People were worried, clearly, but they kept spending anyway. Official statistics later confirmed that consumers had been more resilient than their stated moods suggested.

This disconnect reveals something important: what people say and what people do aren't always the same. A person might tell a survey they feel terrible about the economy while simultaneously clicking "buy now" on a new laptop. We're complicated that way.

The Shorter the Horizon, the Truer the Answer

Survey designers have learned an important lesson about human psychology: the further into the future you ask about, the more aspirational the answers become.

Ask someone what they'll buy in the next twelve months, and you'll hear about the vacation they hope to take, the car they dream of owning, the kitchen they've been meaning to remodel. Ask what they'll buy in the next three months, and you get a much more practical answer.

This is why demand surveys typically focus on short time horizons. Hope is wonderful, but it doesn't predict spending. Plans do.

Around the World in Consumer Confidence

The United States isn't alone in measuring consumer confidence. Similar indices exist in dozens of countries, each adapted to local conditions.

Canada's Conference Board has tracked consumer confidence since 1980, asking Canadians about their household finances, employment prospects, and whether now seems like a good time for major purchases.

Indonesia takes an unusually thorough approach. Bank Indonesia, the country's central bank, surveys about forty-six hundred households across eighteen cities every month. They use telephone interviews and in-person visits, rotating through different areas to ensure broad coverage. At a ninety-nine percent confidence level, their sampling error is just two percent, remarkably precise for a nationwide sentiment survey.

Ireland's KBC Bank and the Economic and Social Research Institute have published monthly sentiment data since 1996, tracking the Irish public's economic mood through the Celtic Tiger boom, the devastating 2008 crash, and the subsequent recovery.

The Organisation for Economic Co-operation and Development, or OECD, publishes a harmonized consumer confidence index that allows comparisons across its member nations. These reveal striking differences in economic mood from country to country, differences that reflect local conditions, cultural factors, and recent history.

The Michigan Alternative

The Conference Board isn't the only game in town. The University of Michigan publishes its own Consumer Sentiment Index, also based on telephone surveys of households across the country.

The two indices often move together, but not always. Different methodologies, different questions, and different sample populations can produce divergent readings. When that happens, economists sometimes average the two together, hoping to cancel out the idiosyncratic biases of each.

This points to a broader truth about economic measurement: no single number captures reality perfectly. Every survey has sampling biases, question-wording effects, and timing quirks. The wise approach is to watch multiple indicators and look for the places where they agree.

The Math Behind the Mood

The Conference Board's methodology is relatively straightforward, though the details matter.

For each of the five questions, researchers calculate what they call a "relative value." They take the positive responses and divide by the sum of positive and negative responses, ignoring the neutrals. This gives a percentage that captures the balance of optimism versus pessimism.

Each month's relative values are then compared against the 1985 baseline, producing an index value for each question. Average those five index values together, and you have the overall Consumer Confidence Index.

The Present Situation Index averages just the two questions about current conditions. The Expectations Index averages the three forward-looking questions. This allows analysts to see whether consumers feel worse about the future than the present, or vice versa, a distinction that can signal whether sentiment is deteriorating or improving.

And the index must be read alongside other data: unemployment claims, retail sales, housing starts, manufacturing surveys, and dozens of other indicators. No single number tells the whole story. The truth emerges from the places where multiple signals converge.

What Confidence Can and Cannot Tell You

A 2022 study confirmed what economists long suspected: consumer confidence reliably predicts consumption growth. When confidence rises, spending follows. The relationship is both positive and statistically significant, meaning it's unlikely to be a coincidence.

But confidence isn't destiny.

Sometimes consumers spend despite their fears, driven by necessity or habit or the simple fact that life goes on. Other times, confident consumers hold back, perhaps because they're paying down debt or saving for a goal that requires unusual discipline.

The index also can't distinguish between the reasons for pessimism. Consumers might feel gloomy because of a genuine economic slowdown, because of frightening but ultimately transient news events, or because of political developments they personally dislike. All of these affect the number, but they have very different implications for actual spending.

The Political Dimension

Consumer confidence surveys ask whether people think the government is doing a good or poor job. This injects a political element into what might otherwise seem like a purely economic measurement.

In a polarized society, partisans tend to feel very differently about the economy depending on who holds power. The same employment numbers and stock prices might produce optimism among supporters of the current administration and pessimism among its opponents.

This doesn't make the index useless. Sentiment matters regardless of its source. A Republican who feels terrible about a Democratic president might genuinely pull back on spending, and vice versa. The economic effect is real even if the underlying cause is more political than material.

But it does mean that sudden shifts in the index around elections or political crises should be interpreted carefully. A drop following a controversial election might reflect genuine economic concern, or it might reflect one party's supporters adjusting their mood to match their political disappointment.

The Paradox of Prediction

Here's an interesting puzzle: if consumer confidence successfully predicts spending, and everyone knows this, shouldn't that knowledge change behavior in ways that undermine the prediction?

Consider a manufacturer who sees confidence falling. They cut production in anticipation of weaker demand. But that production cut means layoffs, which makes consumers more pessimistic, which reduces spending, which validates the original prediction. The forecast became self-fulfilling.

Or consider the reverse. A government sees confidence cratering and launches a stimulus program. Consumer confidence recovers. Spending rises. Was the original forecast wrong, or did the response to the forecast change the outcome?

This is the strange reality of economic indicators. They're not neutral measurements like the temperature in a room. They're signals that powerful actors watch and respond to, which means the act of measuring can change the thing being measured.

Reading Between the Numbers

The sophisticated observer watches not just the headline index but its components. A decline driven entirely by worsening expectations for the future might signal that consumers see trouble ahead but haven't yet changed their behavior. That's worrying but not yet critical.

A decline in the present situation index is more immediately concerning. It suggests people are already struggling, not just anticipating struggle. Spending might already be falling.

The pattern over time matters as much as any single month's reading. A jagged line bouncing up and down suggests uncertainty and volatility. A smooth decline over several months is far more ominous than a single sharp drop that might reverse next month.

The Human Element

Ultimately, consumer confidence tries to quantify something inherently qualitative: the mood of a nation.

Behind the statistics are real people making real decisions. A family debating whether to buy a house. A retiree wondering if their savings will last. A young professional deciding whether to splurge on a vacation or pad their emergency fund. An entrepreneur calculating whether customers will show up if they open a new store.

These decisions aggregate into the spending that drives most economic activity. And while each individual choice responds to specific circumstances, budget constraints, life events, personal priorities, there's also a collective dimension. We're influenced by the economic weather, by the sense of whether times are good or hard, by the feeling that now is the moment to act or the moment to wait.

The Consumer Confidence Index attempts to measure that collective mood. It's imperfect, as all such measurements must be. But for nearly six decades, it's provided a useful window into the economic psyche of the American consumer, the optimism that fuels booms and the pessimism that deepens downturns.

The next time you hear that consumer confidence rose or fell, you'll know what's behind the number: thousands of ordinary people, answering simple questions about how they feel, their collective answer shaping expectations for an economy that depends, more than many realize, on the fragile thing we call confidence.