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.

Key Takeaways

  • Consumer sentiment is an economic indicator that measures how optimistic consumers feel about their finances and the state of the economy.
  • In the U.S., consumer spending makes up a majority of economic output as measured by Gross Domestic Product (GDP).
  • The two numbers expressing consumers' feelings about the economy and their subsequent plans to make purchases are the Consumer Confidence Index (CCI) and the Michigan Consumer Sentiment Index (MCSI).

Understanding Consumer Sentiment

Consumer sentiment developed as an economic statistic during the mid-20th century and has since become a barometer whose results influence public and economic policy.

In the U.S., consumer spending makes up a majority of economic output as measured by Gross Domestic Product (GDP). As much as 70 percent of GDP is driven by a consumer spending component, so the sentiment or attitude of consumers goes a long way in gauging the health of the economy. The other main drivers of GDP are business investments, government spending, and net exports.

If people are confident about the future they are likely to shop more, boosting the economy. In contrast, when consumers are uncertain about what lies ahead, they tend to save money and make fewer discretionary purchases. Gloomy sentiment weakens demand for goods and services, impacting corporate investment, the stock market, and employment opportunities, among other things.

Very bullish consumer sentiment can also be bad for the economy. When people buy lots of goods and services, prices can rise significantly. To stamp out inflation, central banks hike interest rates. Increasing the cost of borrowing tends to slow economic growth and weigh on exports—higher interest rates strengthen the value of currencies.

Recording Consumer Sentiment

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 (CB), and the Michigan Consumer Sentiment Index (MCSI), conducted by the University of Michigan. Both indexes are based on a household survey and are reported on a monthly basis.

Investors closely follow consumer sentiment indexes as they provide a useful indicator of how much demand there is for the goods and services produced by companies listed on the stock market.

Important

Consumer sentiment indexes are lagging indicators because it takes people several months to notice and feel the effect of changes in economic activity.

When analyzing the data, it is important to determine trends graphed out over a longer time frame, such as four or five months. The media often shines a light on changes from one month to the next or the last month against the same month the prior year. Commentary that focuses only on single period values, without looking at the deeper trend, is misleading.

According to the CCI, sentiment hit an all-time low in February 2009 and a record high in May 2000.

Special Considerations

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 sort of 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.