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Economic Indicators: Consumer Confidence Index (CCI)
By Ryan Barnes
Background
The Consumer Confidence Index (CCI) is a monthly release from the Conference Board, a non-profit business group that is highly regarded by investors and the Federal Reserve. CCI is a unique indicator, formed from survey results of more than 5,000 households and designed to gauge the relative financial health, spending power and confidence of the average consumer.
There are three separate headline figures: one for how people feel currently (Index of Consumer Sentiment), one for how they feel the general economy is going (Current Economic Conditions), and the third for how they see things in six months' time (Index of Consumer Expectations).
The Consumer Sentiment Index is a component of the Conference Board’s template of economic indicators. Historically, changes in this index (of the three released) has tracked the leading edge of the business cycle well.
There are other sentiment indicators that can sometimes be confused with the Consumer Sentiment report or used in conjunction with it, such as the University of Michigan Sentiment Report, and some investors will try to average the two reports to get their own sense of consumer sentiment. (For background reading, see Understanding The Consumer Confidence Index and Consumer Confidence: A Killer Statistic.)
What it Means for Investors
A strong consumer confidence report, especially at a time when the economy is lagging behind estimates, can move the market by making investors more willing to purchase equities. The idea behind consumer confidence is that a happy consumer - one who feels that his or her standard of living is increasing - is more likely to spend more and make bigger purchases, like a new car or home.
It is a highly subjective survey, and the results should be interpreted as such. People can grab onto a small situation that garners a lot of mainstream press, such as gas prices, and use that as their basis for overall economic conditions, fair or not. There are no real data sets here, and people are not economists, so they cannot be counted on to realize that, for example, because gas prices may only represent 5% of their expenses, they should not sour their entire economic outlook.
Because of its subjective nature and relatively small sample size, most economists will look at moving averages of between three and six months for consumer confidence figures before predicting a major shift in sentiment; some also feel that index level changes of at least five points are necessary before calling for the reversal of an existing trend. In general, however, rising consumer confidence will trend in line with rising retail sales and, personal consumption and expenditures, consumer-driven indicators that relate to spending patterns.
Regional breakdowns of the data are valuable for seeing the breadth of sentiment across the country, which can be a useful factor in the real estate market, along with indicators such as housing starts and existing home sales.
Strengths
- One of few indicators that reaches out to average households
- Has historically been a good predictor of consumer spending and, therefore, the gross domestic product (consumer spending makes up more than two-thirds of real GDP)
Weaknesses:
- A subjective survey with no physical data sets
- Small sample size (only 5,000 households)
- Survey results may contradict other indicators, such as GDP and the Labor Report
The Closing Line
Sentiment indicators can carry a lot of weight - there are so few that are standardized like Consumer Confidence and, in the final analysis, the happiness and spending ability of Joe Consumer is the most important determinant of an expanding economy.
Next: Economic Indicators: Consumer Credit Report
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