Measuring
Consumer Confidence
If you’ve turned on the news lately, you’ve
more than likely heard the buzz about the latest consumer
confidence levels. This piece of information is important
to everyone, whether you’re an investor in one of
the many investment markets (i.e. Forex market, commodities,
stock market), or just a regular consumer. When consumer
confidence increases, it can positively affect just about
every aspect of the economy, and when it decreases, it can
have a negative affect on a whole range of economic aspects,
from lower domestic currency rates to a decreased number
of car sales.
How is the consumer confidence level measured?
The consumer confidence level is measured by surveying 5000
households on a monthly basis to evaluate their general
level of confidence of the economy. Even though it seems
like a small survey number (and can be highly subjective),
it’s still a popular index that’s widely followed.
However, not every report influences investment markets
and the overall mood of the country – only those indexes
that show a change of more than five points or more.
The report is divided into three main areas: how the general
public feels about the economy as whole (consumer sentiment);
how they feel about the current economic climate (current
appraisal of the economy; and their thoughts and expectations
of the economy’s direction in one month’s time
(index of consumer expectations). The consumer sentiment
portion most closely taps into the future direction of the
country’s economy (a major leading indicator). Overall,
the current condition indexes make up roughly 40% of the
total picture, while the consumer expectation index accounts
for the other 60%.
Pros and cons of the Consumer Confidence Index
The consumer confidence index is a report that normal everyday
America can easily relate to. When the economy is in a downturn
(or upswing), a person usually hears some mention of the
current consumer confidence level on the news. Consumer
confidence levels can even affect outcomes of presidential
races, if the consumer confidence level or mood of the country
is down and the incumbent president (or other key political
leader) is running for re-election.
The Consumer Confidence Index does however have its negative
points. It surveys only a small number of households and
is highly subjective, as a survey participant can be greatly
swayed by just a few negative reports of the economy (i.e.
lower auto sales).
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