A measure of the degree of optimism of consumers regarding current and expected economic conditions
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Conducted by The Conference Board, the Consumer Confidence Index (CCI) measures the degree of optimism of consumers regarding current and expected economic conditions.
The Consumer Confidence Index (CCI) measures the degree of optimism of consumers regarding current and expected economic conditions.
The index is regarded as a forward-looking economic indicator and is closely followed by economists, analysts, government entities, business leaders, etc.
Readings below 75 are considered moderately pessimistic, while readings above 125 are considered moderately optimistic.
Understanding the Consumer Confidence Index
The Consumer Confidence Index acts as a barometer of economic health by tracking how optimistic or pessimistic consumers are regarding (1) the economy, (2) the labor market, and (3) their spending/financial position. It is done through a monthly survey of thousands of households where they respond “positive,” “negative,” or “neutral” on their attitudes toward:
Current economic/business conditions;
Current labor market;
Expected economic/business conditions in the next six months;
Expected labor market conditions in the next six months; and
Expected financial conditions for the next six months.
Once responses to the above are collected, they are weighted and aggregated to form the index number seen in the Consumer Confidence Index.
The Consumer Confidence Index acts as a forward-looking economic indicator and is closely followed by economists, analysts, government entities, business leaders, among others. Furthermore, the index is followed by the Federal Reserve when determining their monetary policies.
Interpreting the Consumer Confidence Index
The Consumer Confidence Index is benchmarked at 100, which was set in 1985. Released on the last Tuesday of every month at 10 a.m. E.T., a reading:
>100 indicates that consumers are more optimistic versus the benchmark.
= 100 indicates that consumers are neutral versus the benchmark.
<100 indicates that consumers are more pessimistic versus the benchmark.
Readings below 75 are considered moderately pessimistic, while readings above 125 are considered moderately optimistic. Regarding month-over-month changes in the index number, a month-over-month change of more than five points is considered significant.
For example, the released consumer confidence index reading for February 2022 was 110.5 versus 111.1 for January 2022. It means that consumers were more optimistic now than in 1985 but more pessimistic versus the previous month.
How is the CCI Interpreted by Investment Professionals?
The CCI reading is used by professionals to compare against expectations. A reading that is above expectations can be regarded as positive, while a reading below expectations can be regarded as negative. With that said, it not clear that a higher/lower reading automatically corresponds to a positive/negative surprise to the financial markets, discussed below.
As an example, a reading above expectations would be regarded as a precursor to higher consumer spending. The markets could perceive it positively or negatively, depending on the current business cycle:
If the economy is in the late business cycle where inflation is likely high, a higher than expected reading could increase inflation expectations. The higher expectations, in turn, could cause the Federal Reserve to adopt a more hawkish policy, which could result in a negative reaction by the financial markets.
If the economy is coming out of a recession, a higher than expected reading could instill confidence in the economy, which could be viewed positively by the financial markets as strong economic momentum.
Drawbacks of the CCI
The main drawback of the CCI is that consumers that are surveyed may lack the necessary information to assess business, labor, and financial conditions for the next six months. Furthermore, the reading from the index is not generally useful for any type of forecasting.
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