What is 'Consumer Sentiment'

Consumer sentiment is a statistical measurement and economic indicator of the overall health of the economy as determined by consumer opinion. Consumer sentiment takes into account an individual's feelings toward his or her current financial health, the health of the economy in the short term and the prospects for longer-term economic growth.

In the U.S., consumer spending makes up a majority of economic output as measured by Gross Domestic Product (GDP). As much as 75% of GDP is driven by a consumer spending component. Naturally, the sentiment or attitude of consumers goes a long way in gauging the health of the economy.

BREAKING DOWN 'Consumer Sentiment'

Consumer sentiment developed as an economic statistic during the mid-20th century and has become a barometer whose results influence public and economic policy today. When consumer sentiment is less positive, markets typically react bearishly and vice versa.

The two numbers expressing consumers' feelings about the economy and their subsequent plans to make purchases are the Consumer Confidence Index (CCI), prepared by the Conference Board, and the Consumer Sentiment Index, prepared by the University of Michigan. Both indexes are based on a household survey and are reported on a monthly basis.

In analyzing any consumer sentiment index, it is most important to determine the trend of the index over several months. Simply put, the trend graphed out over four or five months is critical. Keeping this in mind, you need to remain astute and block out news bits, such as "the index is at 80 so things look gloomy" or "the level of consumer sentiment is up slightly from last month." The trend over several months — not a comparison of this month to the same month last year — is the undeniable benchmark. A commentary that focuses only on single period values, without looking at the deeper trend, is misleading.

History of the Consumer Sentiment Index

For many, the importance of the trends of consumer sentiment rests in the fact that the consumer sentiment index originated in the middle of the 20th century when the concept of the "typical" consumer was more homogeneous. Acknowledging this historical fact, as well as potential sampling bias and possible subjectivity across regions, the safe bet is to focus on trends forming some a linear progression, whether upward or downward, or the progression can hit a general plateau, which sometimes happens when the economy shifts from stages in the business cycle. Explore consumer sentiment further.

RELATED TERMS
  1. Market Sentiment

    Market sentiment reflects the overall attitude or tone of investors ...
  2. Present Situation Index

    The Present Situation Index measures overall consumer sentiment ...
  3. Consumer Confidence Index - CCI

    The Consumer Confidence Index (CCIA) Survey by the Conference ...
  4. Consumer Cyclicals

    Consumer cyclicals are stocks that rely heavily on the business ...
  5. RBC Consumer Attitudes And Spending ...

    The RBC Consumer Attitudes And Spending By Household Index (RBC ...
  6. State Street Investor Confidence ...

    The State Street Investor Confidence Index measures institutional ...
Related Articles
  1. Investing

    Consumer Confidence: A Killer Statistic

    The consumer confidence is key to any market economy, so investors need to learn how to analyze them.
  2. Insights

    Why Consumer Confidence Matters

    As consumer spending is a dominant component of the U.S. economy, how consumers feel about the economy can become self-fulfilling.
  3. Insights

    Consumer Confidence Index

    The Consumer Confidence Index is the result of a monthly survey of 5,000 U.S. households by the Conference Board that measures how optimistic or pessimistic consumers are about the economy's ...
  4. Trading

    4 Key Indicators That Move The Markets

    Do you rely on indicators to make an investment move? Find out these key economic and market indicators to watch and react to market movements.
  5. Trading

    Forex Market Sentiment Indicators

    Sentiment Indicators are another tool that can alert traders to extreme conditions.
  6. Trading

    The 6 Signs Of An Economic Recovery

    For all the talk of whether the economy is recovering or sinking, what should a recovery actually look like?
  7. Insights

    Two Faces of Economy Collide: Data vs. Sentiment

    Soaring confidence about the economy contrasts with hard data showing weakness
  8. Insights

    Comparing Market Returns to Consumer Expectations

    A lot of pundits will tell you there are certain indicators of future market performance. But do those claims hold up?
  9. Investing

    3 Popular Consumer Sector ETFs in 2016 (XLY, XLP)

    Find out which consumer sector exchange-traded funds (ETFs) are the most popular going into 2016 based on the amount of assets under management.
RELATED FAQS
  1. Consumer Confidence Vs. Consumer Sentiment

    Is there any real difference between consumer confidence and consumer sentiment? Read Answer >>
  2. Which economic factors most affect the demand for consumer goods?

    Understand how key economic factors such as inflation, unemployment, interest rates and consumer confidence affect the level ... Read Answer >>
  3. What are some limitations of the consumer price index (CPI)?

    Explore some of the basic limitations of the widely used economic indicator, the consumer price index, or CPI, and examine ... Read Answer >>
  4. How does deflation impact consumers?

    Learn about how deflation affects consumers; they thrive in the short term, but in the long term, deflation can be disastrous ... Read Answer >>
  5. What economic indicators are important for investing in the automotive sector?

    Discover the most important economic indicators when investing in the automotive sector: auto sales, unemployment and consumer ... Read Answer >>
Trading Center