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Key Takeaways

  • The Consumer Confidence Index is a monthly report on the condition of the American consumer.
  • The report is used to help understand where the economy is and where it is headed.
  • When combined with the University of Michigan’s Consumer Sentiment Report, the CCI provides a complete picture of the state of consumers in the economy.

To have a robust and vibrant economy, you need consumers who are willing to spend money. If the consumer is scared about their economic future, because of factors like inflation, regulations, or oil prices, they will limit spending which hurts the overall economy. If they believe the economy is moving in the right direction, they are more likely to spend with confidence.

But how do investors know how the consumer is feeling? They turn to the Consumer Confidence Index. Here is what you need to know about this critical economic report.

What is the Consumer Confidence Index?

The Consumer Confidence Index (CCI) consists of a survey administered by a not-for-profit organization known as the Conference Board (CB). The Conference Board consists of a board of economists who interpret the data from its surveys to create a current and future look at how people feel about the economy. The results are then distributed to its members (made up of over 1,000 businesses).

Based on the result of the surveys, the Conference Board generates three business cycle indicators: the composite indexes of leading, consistent, and lagging indicators.

A total of 10 components make up the indexes mentioned above:

  • Average weekly hours
  • Average weekly unemployment insurance claims
  • New orders for consumer goods and/or materials
  • Vendor performance or delivery times for manufacturers
  • Building permits for private homes
  • S&P 500 index
  • Money supply
  • Interest rate spread
  • Index of consumer expectations

When taken together, these components provide a clear forecast of the upcoming issues the economy is most likely to face. Consumers drive the economy, and their feelings about their spending ability strongly influence how well the economy will perform in the upcoming months. Consumers’ ability to spend money on discretionary and non-discretionary items causes manufacturers to respond to consumer demand.

Manufacturers don’t want to carry excess inventory, but they do want to make profits. The CCI helps businesses determine how much demand there will be for their products, how to respond to overall consumer sentiment, and what decisions to make about product development. Combining the CCI with internal operating goals and forecasts helps a business stay competitive and profitable. Along the same lines, investors are more likely to make money on their stock picks and earn more in dividends due to better decisions by the companies behind the stocks.

Consumer Confidence Index vs. University of Michigan’s Consumer Sentiment Report

The CCI is not the only report that measures the state of consumer sentiment. Another popular report is the Consumer Sentiment Report conducted by the University of Michigan. This, too, is a monthly report that analyzes how the consumer feels about the economy and where it is going.

While these reports might sound similar, there are some key differences. First, even though both reports are conducted monthly, they are done so at different times of the month. When there is a major event, like the announcement of tax cuts or a spike in oil prices, consumer confidence can change very quickly. Another important difference is that the CCI asks many more questions to understand better where consumers are financially. With that said, the questions that the University of Michigan survey asks are much more detailed.

Investors and economists need to review both of these reports to get a detailed look at the status of the U.S. consumer.

How to read the Consumer Confidence Index

The Conference Board conducts an online survey of random consumers who answer questions based on how they feel about the economy. If the results are over 100, it indicates that consumers are feeling good about the economy; results below 100 indicate they are feeling concerned.

The questions cover how consumers feel about their ability to earn and save, how secure they feel in their future earnings, as well as their feelings about the overall economy and unemployment levels.

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This index also helps investors and economists understand where the economy is and where it is going in the future. If consumers have negative feelings about the economy’s future, then odds are they won’t buy a house or a car, as these large purchases come with monthly payments. Taken along with other economic indicators, the consumer confidence index helps identify recessions.

As of September 2022, the Conference Board reported that the consumer confidence index rose to 108.0, an increase from the August reading of 103.2. This marks the third straight month it has risen.

What does the Consumer Confidence Index mean to investors?

The CCI helps investors make informed decisions about their investment choices. Various industries respond to the index differently. An investor can take advantage of shifts in overall consumer sentiment by investing in companies that historically do well during upturns and downturns.

For example, when feeling financially uncertain, discretionary spending is the first thing that’s eliminated from a consumer’s budget. They’ll put their income toward necessities first and save the rest while spending little on items like entertainment. An investor can take advantage of this fact by picking mainstay equities such as big-box stores like Walmart and Target because consumers look for the lowest prices during a time of financial stress.

At the same time, investors may consider buying entertainment stocks when prices fall with the intent to hold them long-term. Consumers eventually return to their discretionary spending habits when they feel good about the economy, and entertainment stocks typically regain value.

The above is not investment advice, but it highlights how the Consumer Confidence Index can be used for informed decision-making when selecting equities for a portfolio. Always research the historical performance of a stock to determine how the index influences its price along with other factors.

Bottom Line

The Consumer Confidence Index is one of many economic indicators that help economists understand where the economy is and where it might be going. Likewise, investors can use the data from the monthly reports to make smarter investment decisions, as a drop in confidence could spell a weaker stock market in the upcoming months.

It’s essential for investors to pay attention to this report as well as other economic reports to get a complete picture of the health of the U.S. economy. Q.ai takes the guesswork out of investing.

Our artificial intelligence scours the markets for the best investments for all manner of risk tolerances and economic situations. Then, it bundles them up in handy Investment Kits that make investing simple and – dare we say it – fun.

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