Consumer Confidence

Answer 1

You’ve probably heard the talking heads on the news talking about consumer confidence, or consumer sentiment, or the consumer confidence index. What do these terms really mean? More importantly, what do they mean to you in terms of your personal finances?

One of the most powerful forces in our economy is the collective power of consumers buying things. That’s why those in power look to people to buy things even in inappropriate times. (A prime example is that of former President Bush trying to get people to fight back at the terrorists who attacked our country in 2001 by encouraging us all to go shopping.) While I’m not a big fan of consumerism, it’s true that it does define our society, and drive our economy.

That’s why consumer confidence is so important to those concerned with the economic health of our country. When consumers feel secure in their ability to earn money, when they feel their jobs are secure, they’re much more likely to consume confidently. When they feel that the state of the economy could impinge on their ability to keep their job, or spend at previous levels, they will begin to save more money and throw less of it back into the economy via spending.

So, in essence, consumer confidence is about how the American workforce feels about its prospects of continued employment. It can be a powerful tool for monitoring the shape of the economy as a whole. To this end economists have devised several indices to measure consumer confidence. The most famous is the Consumer Confidence Index, calculated and maintained by The Conference Board. Since 1967 it has served as a gauge of consumer confidence and given folks an idea as to the overall health of the economy. It is released monthly.

Another one to watch is the MCSI, or University of Michigan Consumer Sentiment Index. Also produced monthly, it gives another litmus test for consumers’ feelings surrounding the stability of the economy. Related numbers produced by the University are incorporated into the U.S. Index of Leading Economic Indicators. So, it’s an important one to watch.

So when you hear about consumer confidence going up or down, don’t dismiss it as something unrelated to you and your finances. Chances are pretty good that those numbers will affect you in one way or another down the road.