Consumer confidence
Overview
Consumer confidence refers to the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. If the consumer has confidence in the immediate and near future economy and his/her personal finance, then the consumer will spend more than save.
When consumer confidence is high, consumers make more purchases. When confidence is low, consumers tend to save more and spend less. A month-to-month diminishing trend in consumer confidence suggests that in the current state of the economy most consumers have a negative outlook on their ability to sustain and increase their current level of income.
Measurement of Consumer Confidence
Consumer confidence is measured by several analytics firms, with the Consumer Confidence Index being one of the most prominent because of its longevity and the consistent methodology with which it is calculated. The CCI is a monthly release from the Conference Board, and it is an indicator designed to measure consumer confidence. This is defined as the degree of optimism about the state of the economy that consumers are expressing through their saving and spending activity.
Other measures of consumer confidence include the Michigan Consumer Sentiment Index, which uses a different methodology, but is still considered a reliable measure of consumer sentiment. The Gallup Economic Confidence Index is another measure, and it is a more recent development in the field of consumer confidence metrics.
Factors Influencing Consumer Confidence
Consumer confidence is influenced by several factors, most notably employment and wage levels, but also overall economic growth, inflation, and the state of the world economy. Other factors can include political stability, changes in government policy, and other national and international events.
Employment and Wage Levels
Employment and wage levels are perhaps the most significant factors influencing consumer confidence. When employment levels are high and wages are rising, consumers tend to have more confidence because they see that people are getting jobs and incomes are increasing. This gives them confidence that the economy is doing well and that they will be able to continue to earn and increase their income.
Economic Growth
The overall rate of economic growth is another significant factor. When the economy is growing, consumers tend to be more confident because they see that businesses are doing well, jobs are being created, and the overall economic outlook is positive.
Inflation
Inflation is another key factor. When inflation is low, consumers are more confident because they know that their money will hold its value. When inflation is high, consumers tend to be less confident because they worry that their money will not go as far and that they will have to spend more to get the same goods and services.
State of the World Economy
The state of the world economy can also have a significant impact on consumer confidence. When the world economy is doing well, consumers tend to be more confident because they see that other countries are doing well and that there are opportunities for international trade and investment. When the world economy is not doing well, consumers tend to be less confident because they worry about the impact on their own country's economy.
Impact of Consumer Confidence on the Economy
Consumer confidence is not just a measure of economic sentiment, but it can also have a direct impact on the economy. When consumers are confident, they are more likely to spend money, which can stimulate economic growth. Conversely, when consumers are not confident, they are more likely to save money, which can slow economic growth.
Consumer confidence can also have a significant impact on the stock market. When consumer confidence is high, investors are more likely to buy stocks because they believe that companies will do well as consumers spend more money. When consumer confidence is low, investors are more likely to sell stocks because they believe that companies will do poorly as consumers spend less money.