What Is the Expectations Index?
The Expectations Index is a component of the Consumer Confidence Index® (CCI), which is published each month by the Conference Board. The CCI reflects consumers’ short-term—that is, six-month—outlook for, and sentiment about, the performance of the overall economy as it effects them. The Expectations Index is made up of the average of the CCI components that deal with six-month outlooks for business, employment, and income.
- The Expectations Index reflects the forward-looking components of the Conference Board’s Consumer Confidence Index.
- It includes three survey items, covering consumers’ six-month outlook for business conditions, employment, and income.
- As a forward looking indicator of the economy, the Expectations Index is closely watched to inform investment and business decisions.
Understanding the Expectations Index
The Expectations Index comprises exactly 60 percent of the overall Consumer Confidence Index; the CCI is an average of responses to five survey questions, three of which deal with expectations over the next six months. The average of those three items makes up the Expectations Index.
Participants in the Consumer Confidence Survey answer questions about whether, in the next six months, they expect business conditions to be better, worse, or the same; and if they believe that employment and income is expected to increase, decrease, or stay the same. Respondents can answer each question with one of three responses: “positive, negative, or neutral.” The survey also asks supplementary questions about participants’ spending plans over the next six months and their outlook for inflation, interest rates, and stock prices over the next 12 months.
The other 40 percent of the CCI is used to derive the Present Situation Index. Unlike the Expectations Index, the Present Situation Index, as its name implies, is concerned with how consumers feel about a set of economic factors now, not what they think those factors would be like in the near future. Both indexes are generated from responses gathered by the Conference Board’s monthly Consumer Confidence Survey®.
This survey polls 5,000 households about their attitudes toward prevailing business and economic conditions, and their thoughts about what may develop in the months ahead. Once the survey data for the present and expected conditions are collected, the two sub-indexes are combined to create the complete Consumer Confidence Index, where the data are arranged according to age, income, and region, among other demographic factors. The CCI is widely regarded as an accurate leading economic indicator for the United States economy.
Expectations Index Is a Critical Component of CCI
Because the Expectations Index may be used to gauge future trends, and may affect current decision-making behavior, it is the most important component of the Consumer Confidence Index; and businesses often use it to help make better-informed decisions or adjustments in strategy.
For example, if the Expectations Index shows that consumers likely would not be spending more on discretionary travel during the next six months, then the leisure industry might not build new luxury hotels in that time frame.
Or, if the Expectations Index indicates that business conditions, employment, and income likely would remain the same instead of rising over the next six months, then executives might decide to postpone investments in new projects until a later date.