As a key economic indicator, consumer confidence has become an important measure for government, businesses and banks. It reflects how consumers feel about their current financial situation and where they think the economy is headed in the future. A rising confidence index indicates optimism, while a falling one means pessimism.
The Conference Board’s consumer confidence index (CCI) is a monthly report that tracks how consumers view their current financial situation, the overall economy and their personal finances. The index includes five questions: two about their present financial situation and three about their expectations for the economy over the next six months. The resulting amplitude adjusted index is then compared against the CCI benchmark of 100 set in 1985 to determine whether consumers are feeling more or less optimistic.
When consumer confidence is high, it can boost the economy by increasing spending. This is often a result of the wealth effect, whereby higher home and stock prices make consumers feel richer and more inclined to spend. Conversely, when confidence is low, it can cause consumers to hold off on purchases and save more.
However, some experts believe that measuring consumer confidence is problematic. They point to a 1994 article by Christopher Carroll, Jeffrey Fuhrer and David Wilcox, which showed that even when other widely available economic forecasting data is included, consumer confidence provides only a small improvement in predictions of consumption growth over the following month. Instead, they argue that looking at the whole landscape — like inflation rates and unemployment data — is more helpful.
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