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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