Question

Document one or more methods used to characterize and measure consumer confidence. Compare and contrast how confidence might be related to financial markets’ expectations of risk of a recession, similarly to interest rate spreads. Do you find consumer confidence to be a useful measure? Explain why or why not.

Also comment on indicators contained in “economic fundamentals,” in its value to firm managers.

Answer 1

Consumer confidence, measured by the Consumer Confidence Index (CCI), is defined as the degree of optimism on the state of the economy that consumers (like you and me) are expressing through their activities of saving and spending. The CCI is prepared by the Conference Board and was first calculated in 1985. In that year, the result of the index was arbitrarily set to 100, representing the index’s benchmark. This value is adjusted monthly based on results of a household survey of consumers’ opinions on current conditions and future economic expectations. Opinions on current conditions make up 40% of the index, with expectations of future conditions comprising the remaining 60%. Manufacturers, retailers, banks and the government monitor changes in the CCI to factor in the data in their decision-making processes. While index changes of less than 5% are often dismissed as inconsequential, moves of 5% or more often indicate a change in the economy’s direction. A month-to-month decreasing trend suggests consumers have a negative outlook on their ability to secure and retain good jobs.