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Waseem Alim

Consumer confidence is a term for consumers' level of optimism about the economy. It is used to capture people's perception, rather than the actual state, of the economy. Consumer confidence affects consumption, which accounted for 74% of the US Gross Domestic Product in the first quarter of 2008.^[1] This is because people tend to adjust their spending based of expectation of the future. Factors such as changes in employment levels, increase/decrease in gasoline prices, inflation expectations and major events, e.g. terrorist attacks, hurricanes and ending a war, affects consumer confidence. Consumer confidence tends to vary from country to country.

Measures of Consumer Confidence

University of Michigan Consumer Sentiment Index (Jan 1978- Jan 2008)^[2]

In the U.S. consumer confidence is measured by two studies:

The US Consumer Confidence Index is calculated by the Conference board, an independent economic research, and is published on the last Tuesday of each month. It is conducted through a mail survey of 5000 households. The respondents are asked to state their feelings (positive, negative or neutral) about current business conditions, business conditions for the next six months, current employment conditions, employment conditions for the next six months and total family income for the next six months. The results are compiled together and normalized against the January 1985 value of 100.^[3]

The University of Michigan Consumer Sentiment Index, calculated and published by the University of Michigan each month, is measured by conducting a phone survey of at least 500 households. The survey contains 50 questions focusing on three broad areas: personal finances, business conditions, and buying condition. It aims to capture people's feelings about their personal finances and the state of the economy. From these surveys, the Index of Consumer Sentiment (ICS) is calculated. The index is normalized to have a value of 100 in December of 1964.^[4]

Who is affected by changes in consumer confidence

Consumer confidence affects consumption, which accounted for 74% of the US Gross Domestic Product in the first quarter of 2008.^[5] This is because people tend to adjust their spending based of expectation of the future. Lower consumer confidence, leads to lower overall spending and vice versa. Economists have concluded that spending on durable goods, such as cars and computers, is affected more than spending on non-durable goods, such as food -- since, consumers tend to put off the high budget items till they feel comfortable about purchasing them.^[6] High consumer confidence bodes well for almost all types of businesses.

The type of businesses that are affected most by changes in consumer confidence are:

• Retailers

• Automobile Manufacturers

• Wholesale Distributors

The type of businesses that are affected least by changes in consumer confidence are:

• Utilities

• Conglomerates

References

1. ↑ Bureau of Economic analysis, Retrieved 7/30/2008
2. ↑ Data from University of Michigan, retrieved 7/30/2008
3. ↑ The Conference Board Consumer Index, Retrieved 07/25/08
4. ↑ University of Michigan Consumer Sentiment Index: Survey Information, retrieved 07/25/08
5. ↑ Bureau of Economic analysis, Retrieved 7/30/2008
6. ↑ Why Consumer Confidence Matters?, BBC New, Retrieved 7/20/2008