What is the Present Situation Index?
The Present Situation Index is a subindex that measures overall consumer sentiment regarding the present economic situation. This index is determined via a survey conducted for the Conference Board by Nielsen, and it is used to derive the Consumer Confidence Index. This is also sometimes known as the Current Situation Index.
- The Present Situation Index is an indicator of consumer sentiment about current business and job market conditions.
- Combined with the Expectations Index, the Present Situation Index makes up the monthly Consumer Confidence Index.
- Businesses, investors, and economic policymakers watch the Present Situation Index along with related indicators to help gauge near-term consumer demand.
Understanding the Present Situation Index
The Present Situation Index deals with consumer estimates of the current state of the economy as it relates to them. To construct the Present Situation Index, the Conference Board surveys approximately 5,000 households (with 3,000 respondents) by mail each month. In order to measure current consumer sentiment, the survey includes five questions regarding current conditions on business and employment and future expectations six months hence on business, employment, and total family income. Participants in this survey are asked to answer if they feel positive, negative or neutral.
For each question, the number of positive responses is divided by the sum of positive and negative responses. This number is then indexed to its average value for the benchmark year, 1985. The average of the resulting indexes for the five questions is then calculated to determine the Present Situation Index.
Once the Conference Board conducts its appraisal of the present situation and calculates its value, the Present Situation Index is combined with another sub-index called the Expectations Index to form the Consumer Confidence Index. The Consumer Confidence Index measures consumer sentiment regarding both present and near-term future economic conditions.
The Consumer Confidence Index is a widely-used economic indicator, which serves as a barometer of the health of the U.S. economy from the perspective of the consumer. The combined Consumer Confidence Index is also used as a component of the Conference Board Leading Economic Index. Based on a range of economic conditions, the Leading Economic Index and its related measures are among the earliest sets of economic indicators available each month and serve as leading indicators for the U.S. economy.
Applying the Present Situation Index
Businesses often use this subindex to gain perspective on current market conditions and make more informed business decisions. Indicators of current consumer sentiment may be more reliable and less volatile than indicators of expectations regarding future conditions or planned future purchases. After all, consumers could easily change their planned future expenditures at any time based on changes to current conditions.
Economists generally believe that consumers hold either rational or at least adaptive expectations, though alternative theories including behavioral economic ideas regarding cognitive biases toward present and future economic decisions are also popular. Regardless, perceptions of current economic conditions are obviously important to help gain insight that can improve the quality of business and investment decisions that will carry through into future quarters.
When the Present Situation Index shows current economic sentiment as positive, this can be viewed as a positive signal that the economy is strong or in recovery. Businesses, investors, and entrepreneurs can use this information (along with a range of other general and market specific indicators) to help gauge near-term demand for their products. Economic policy makers in government agencies and central banks also consider indicators of consumer sentiment in setting targets on things like interest rates and monetary policy.