04) Economic Indicators: Consumer Confidence Index (CCI)

by · October 16, 2010

What It Is

The Consumer Confidence Index (CCI) is one of the very few reports that gauge the outlook of the average consumer. It’s released by the Conference Board, a non-profit organization with the recognition of both investors and the Federal Reserve. The report is made available the last Tuesday of every month and is compiled with information gathered on the previous month.

Basic Information

The main purpose of coming up with the report, which is participated by over 5,000 households, is to measure the general financial spending power or economic wealth, as well as the confidence to the economy, of the average consumers. This is a very highly subjective report, as the views will depend on how the respondents see ever economic factor.

Nevertheless, it’s still highly valued because it can help dictate the moment of investors in the market. If you have a very poor consumer confidence rating, then many of them will be selling their equities. After all, it assumes that there will be less people who are willing to spend their money. On the other hand, if it’s high, then most likely the consumers are satisfied with their standard and living and have sufficient or more than enough purchasing power. A very strong report in the middle of an economic recession may indicate the possibility of economic growth in the next few months.

There are three different components in the report. The first one is called the Index of Consumer Sentiment. It measures the overall sentiment of the consumers based on a number of factors. This one is sometimes analyzed together with the University of Michigan Sentiment Report. Their general average is obtained to generate the investors’ own consumer sentiment. It also forms part of the template used for determining economic indicators by the Conference Board.

The second one is the Index of Consumer Expectations, which informs you the view of the consumers within the next six months. The last one is the Current Economic Conditions, which is the general view of the consumers in the present economy.

 

How the Report Is Valuable

It focuses on the average consumer, which is actually a very powerful force in the economy. If they don’t like to spend their money, you really cannot expect the economy to go very high. And because it relates to spending, it is often associated with the gross domestic product. Consumer spending composes more than a third of the country’s GDP.

The report also breaks down data according to different regions. Thus, you can have a more comprehensive picture of the sentiments of consumers based on their locations. This can be helpful for those who are in the real estate market, as they can relate consumer confidence to existing home sales and housing starts.

Things to Watch Out For

The sample size is considered to be very small or limited by many, considering there are millions of people nationwide. It is also highly subjective. You will hardly get any real sets of data. A consumer may view the next six months as grim even if other indicators indicate otherwise simply because he is currently unemployed. It’s also because of its level of subjectivity that the results may contradict those of the Labor Report and the country’s GDP.

To somehow soften the subjective approach of the report, majority of economists will make use of moving averages. They will gather the confidence figures for the last six months and analyze them before they can come up with a good predication of any sentiment shift of consumers. There should also be level changes of no less than five factors or points before they pronounce that there is a change in the existing trend. However, usually consumer confidence is directly linear to sales and spending. This means if the spending and sales are high, the consumer confidence is also high.

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