{"id":15989,"date":"2022-06-24T14:00:23","date_gmt":"2022-06-24T14:00:23","guid":{"rendered":"https:\/\/www.revuze.it\/?p=15989"},"modified":"2022-06-24T14:00:23","modified_gmt":"2022-06-24T14:00:23","slug":"what-is-consumer-confidence","status":"publish","type":"post","link":"https:\/\/www.revuze.it\/blog\/what-is-consumer-confidence\/","title":{"rendered":"What Is Consumer Confidence?"},"content":{"rendered":"
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Consumer confidence is an economic indicator, one that measures the overall state of the economy based on how consumers feel about it and their own personal financial situation. It\u2019s measured via either monthly or quarterly surveys targeted at households rather than individuals, with the Consumer Confidence Index (CCI) and the Michigan Consumer Sentiment Index (MCSI) being the main two indexes used in the US.<\/span><\/p>\n Both of the above indexes are released monthly, with relative values adjusted according to a standard. This makes reading these indexes at the basic level easy enough for the average layperson to do, with deeper understandings also being available with deeper analysis.<\/span><\/p>\n What is the difference between consumer confidence and consumer sentiment?<\/span><\/p>\n Consumer sentiment <\/span>is another economic value that is measured via monthly surveys. While the two may seem similar, the term \u201cconsumer confidence\u201d usually refers to employment and labor market factors, while \u201cconsumer sentiment\u201d places more emphasis on individual household finances. You can think of consumer confidence as a subcategory of consumer sentiment, one aimed at examining employment stability.<\/span><\/p>\n While both the CCI and MCSI measure consumer sentiment, only the CCI is seen as a source of information on consumer confidence as the questions it poses are directly related to employment conditions and the financial security these bring.<\/span><\/p>\n The Consumer Confidence Index (CCI) is a monthly survey administered by the Conference Board, based on five questions that households around the US answer. Around 5000 households are surveyed each time, spread out according to population density in order to try and get an accurate picture for the entirety of the USA.<\/span><\/p>\n The questions the CCI asks are about the following topics:<\/span><\/p>\n The answers to the first two questions can be taken and converted into the Present Situation Index, looking at the current situation that consumers find themselves in, with the answers to the latter three forming the Expectations Index, a measure of the outlook for the future. Together they form the CCI, though it\u2019s been argued that the two measures are more valuable when separated than together.<\/span><\/p>\n <\/p>\n Consumption is the lynchpin of the US economy. On a basic level, the CCI can be thought of as an indicator of willingness to partake in this process.. If consumer confidence is high, this indicates a willingness on the consumers\u2019 parts to spend more money, thus stimulating the economy. If the outlook is low, spending will decrease and the overall economic health will be lower.\u00a0<\/span><\/p>\n Overall, large drops in the CCI indicate periods of economic recession, while climbing rates indicate economic recovery. It should be noted that the line goes up and down periodically, so while all changes are noted only those of 5% or greater are considered \u201ctrue economic indicators\u201d by experts.<\/span><\/p>\n Going deeper, the two facets of the CCI can be contrasted in order to glean more insight. Below you\u2019ll find the Present Situation Index (PSI) and the Expectations Index (EI) on the same graph for comparison.<\/span><\/p>\n <\/p>\n As you can see, the two indexes are not always aligned. Since 2014 the PSI has sat above the EI, only dipping below it in early to mid 2020 at the beginning of the COVID-19 pandemic. This contrast indicates that while consumers are fairly confident in their current situation, they expect their economic situation to worsen in the future and thus will look to spend less as time goes on.<\/span><\/p>\n On the other hand, there have been moments where the PSI sits below the EI, for example the period between 2009 and 2014. This indicates the opposite to the above case, where consumers expect their situation to improve over time compared to their present.\u00a0<\/span><\/p>\n Taking just the PSI into account, large drops over a relatively short period of time are an indicator of economic recession, as when the economy takes a turn for the worse employment stability is not guaranteed.\u00a0<\/span><\/p>\n As you can see in the two shaded areas of the graph above which represent economic recessions, the EI also may dip but may also remain unimpacted. A dip in the EI indicates a longer-term economic impact, whereas if it remains stable the recession is expected to be short-term.\u00a0<\/span><\/p>\n One crucial thing that you should keep in mind is that these numbers are all based on consumer beliefs, not economic data, and cannot take into account unforeseen problems that impact the economy. The COVID-19 pandemic is a prime example, with consumers being completely unable to see it coming and that being reflected in the EI on the chart above.<\/span><\/p>\n As mentioned earlier, the CCI is based on responses to five questions asked to households around the US. The mathematics of the CCI are rather complex, but a simple explanation is that it is a relative value – it\u2019s compared to a point in the past in order to make the numbers less complex.\u00a0<\/span><\/p>\n In the case of the CCI, that number is currently the value that was received in <\/span>1985<\/span><\/a>. All other numbers on the chart are measured as a percentage of that value, with 100 being equivalent to the consumer confidence that was recorded in 1985, less than 100 representing lower consumer confidence and more than 100 being a sign of greater consumer confidence.<\/span><\/p>\n The Consumer Confidence Index is considered one of the most reliable economic indicators in the US, with banks and corporations watching it closely. That doesn\u2019t mean that it lacks flaws though, as no index can take into account every factor that affects the economy. Below you\u2019ll find some of the criticisms of the CCI, and why those criticisms matter.<\/span><\/p>\n The Business Cycle Indicators (BCI) serves as a means of examining economic prospects from the perspective of businesses rather than households. This index is gathered using similar methods as the CCI, however the respondents are higher ups in the business world with the questions aimed at their organization, rather than them personally. The BCI is far more useful to those who deal mainly in B2B transactions as the economic factors that affect these necessarily aren\u2019t represented in the CCI.<\/span><\/p>\n The BCI is a far more complex and detailed report than the simple outlook of the CCI, containing dozens of different factors and indicators that may affect the business world. For this reason it\u2019s often seen as more reliable but in turn more difficult to interpret. Categories of indicators examined in the report include:<\/span><\/p>\n While the report mainly focuses on the US, there are comparisons made available at the end of each monthly report to other countries, including Japan, the UK, China, and Canada, with information pertaining to industrial production and exchange rates being among those included.<\/span><\/p>\n While the sheer volume of information may seem daunting – each report is around forty to fifty pages long! – you can narrow it down by focusing only on the information relevant to you. For instance, the manufacturing orders are split into categories based on industry thus you can ignore all not relevant to your business.<\/span><\/p>\n The BCI is an extremely useful tool to have in your pocket, and if you can decipher it even a little it will prove a great boost to your business. Information that you can take away from it includes:<\/span><\/p>\n While all this is good information on the state of the market at large, it can\u2019t tell you about how a specific product is viewed by its purchasers. Knowing how consumers and businesses alike react to a specific brand or product is known as customer sentiment<\/span>, and it can be a great help when used alongside consumer or business confidence to determine the viability of products in the current market.<\/span><\/p>\n Customer sentiment is aggregated from existing reviews rather than surveys, as making surveys about hundreds of individual items is simply not feasible. Because of this, customer sentiment can be biased heavily towards either the positive or negative as customers are more likely to leave reviews after a standout experience with a particular product or brand, whether that is good or bad.<\/span><\/p>\n This doesn\u2019t mean that customer sentiment is useless, far from it. The perception of a brand<\/a> or particular product in the customer’s eye is a great indicator of how willing people are to spend money on it, which when combined with the CCI\/BCI can give you an idea of how much they are willing to spend at any point in time. A low customer sentiment paired with a high CCI\/BCI rating can still turn profits, while a high value of customer sentiment might still be a cash cow when the CCI\/BCI is low.<\/span><\/p>\n Ready to put your data and trend interpretation skills to good use?<\/span><\/p>\n Sentimate offers customer sentiment ratings on thousands of different products across a wide range of industries, with comparisons and deep analyses available. <\/span><\/p>\nConsumer Confidence vs Consumer Sentiment<\/span><\/h2>\n
The Consumer Confidence Index<\/span><\/h2>\n
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Understanding The Consumer Confidence Index<\/span><\/h2>\n
How Is The Consumer Confidence Index Measured?<\/span><\/h2>\n
Criticisms Of Consumer Confidence<\/span><\/h2>\n
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\n<\/span>The CCI is prone to fluctuations, as can clearly be seen on the charts in the previous sections. Because of this, those monitoring the CCI and using it to predict economic outlooks may have a reaction to a perceived economic boom or downturn, when in reality it\u2019s nothing more than a monthly fluctuation.
\n<\/span>Plenty of organizations will ignore fluctuations that are less than 5% of the index in order to account for this, however even this doesn\u2019t cover all cases. Others have started using a moving average of values, however the Conference Board does not provide raw data so these values are pulled from a chart and therefore not completely accurate.<\/span><\/li>\n
\n<\/span>Critics of the CCI have long since classified it as a lagging indicator, one that can only react to changes in the economy after they have happened. While true that it takes time for economic impacts and the news of them to filter through to consumers, in the age of the internet and instant communication this criticism is less valid.<\/span><\/li>\n
\n<\/span>The CCI covers the entirety of the US, and thus does not account for local economic impacts. For instance, hurricanes tend to hit Florida and the other south-eastern states fairly regularly and have a great impact on consumer spending in that area. The CCI, covering the entire US, will fail to show that impact and any business in those areas that takes it at face value will be in for a bad time.<\/span><\/li>\n
\n<\/b>According to <\/span>Adair Turner,<\/span><\/a> former Chairman of the UK Financial Services Authority, <\/span>“if credit finances consumption rather than useful investment, it is more likely that the debts created will subsequently prove unsustainable.”
\n<\/span><\/i>What does this mean? Well, in short, it\u2019s that using the CCI to make predictions about the economy will lead to organizations creating unsustainable business models that will eventually backfire. Unsustainable debt and an unstable housing market have often been blamed for the 2008 housing crisis and subsequent global recession. In short, consumption as an economic foundation has limits and the CCI can fail to acknowledge these.<\/li>\n
\n<\/b>A final criticism, one mostly aimed at the Expectations Index, is that consumer behavior in the future isn\u2019t necessarily linked to how they expect it to turn out in the present. Minds can be changed, estimations can be wrong, etc. and some critics have slammed the EI as simply being guesswork.<\/li>\n<\/ul>\nThe Business Cycle Indicators<\/span><\/h2>\n
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Customer Sentiment<\/span><\/h2>\n