Why Consumer Confidence Index Important?

The US Consumer Confidence Index (CCI) 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.

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

The Consumer Confidence Index and the Consumer Sentiment Index are two of the most important economic predictors you can watch. Just remember to watch the trend over several months and don’t get caught up in month-to-month hysteria. Understanding the importance of consumer spending and it implications for the stock market will help you become a better investor.

The Consumer Confidence Index measures Americans’ attitudes about current and future economic conditions. It is based on a monthly survey of 5,000 households conducted for The Conference Board. The Board develops a report based on the survey that gives details about consumer attitudes and buying intentions, with data available by age, income, and region. This is compiled into three numbers:

1. The overall Consumer Confidence Index
2. The Present Situation Index
3. The Expectations Index.

If the Consumer Confidence Index is trending upwards, this means that stocks will probably go higher, as well. If Confidence is too high, then the excessive demand it is measuring could trigger inflation, which could lead the Federal Reserve to raise interest rates. Higher interest rates could also increase the value of the dollar, which could reduce exports and make imports cheaper.