The Impact of Consumer Confidence
on Business and Investing

By Stock Research Pro • April 29th, 2009

Consumer confidence is the term used to describe the level of confidence consumers have in the economy. Rather than assess the actual state of the economy, the consumer confidence measure is used to understand the current perception among consumers. The measure is an important one since consumer spending is the key component for the success of a market economy. In fact, consumer spending represents roughly 65% of the total spending in the United States and similar levels are seen among the highly industrialized nations of the world. Consumer confidence is typically impacted by factors that include employment levels, inflation expectations, fuel prices, and major news events.



How Consumer Confidence is Measured

There are two primary measures regarding consumers’ feelings about the current state of the economy and their spending plans:

The Consumer Confidence Index is a survey by the Conference Board that measures how consumers feel about the economy in the coming months (how optimistic or pessimistic) and their subsequent plans to spend. The survey is conducted through a mailer to over 5000 households and the results are published on the last Tuesday of every month.


The Current Consumer Confidence Measure

The Consumer Sentiment Index is conducted by the University of Michigan through a telephone survey to over 500 households with the goal of measuring peoples’ feelings about their personal finances and the current state of the economy.


Historical Data from the Survey

While both indexes are concerned with the expectations consumers have for their spending, the Consumer Confidence Index is more focused on business.


The Use of Consumer Confidence Measures for Businesses

Businesses including retailers, banks, manufacturers, and others track consumer confidence measures closely in order to make their plans regarding spending, operations, and levels of employment. If, for example, consumer confidence is in a decline, businesses will cut down their production and inventories and possibly delay any expansion projects.


The Use of Consumer Confidence Measures for Investors

Some investors tend to monitor consumer confidence as part of a market timing strategy. Non-cyclical stocks tend to perform well when consumer confidence is low. On the other hand, companies that offer luxury types of items (e.g. entertainment and travel) may perform better when consumer confidence is high.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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