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.