How to Interpret the Consumer Confidence Index

How to Interpret the Consumer Confidence Index

In our last lesson we looked at Existing Home Sales and what this number tells us not only about a very large part of the economy, but also the economy as a whole. In today’s lesson we are going to look at another indicator which surveys the consumer’s opinion on the current state of the economy, and tends to lead the business cycle: The Consumer Confidence Index.

In our last lesson we looked at Existing Home Sales and what this number tells us not only about a very large part of the economy, but also the economy as a whole. In today’s lesson we are going to look at another indicator which surveys the consumer’s opinion on the current state of the economy, and tends to lead the business cycle: The Consumer Confidence Index.

Released at 10am EST on the last Tuesday of each month, the Consumer Confidence Index (CCI) is a monthly survey of over 5000 households, the purpose of which is to gauge the financial health, spending power, and confidence of the average consumer.

The CCI contains three separate headline numbers which are:

1. The Index of Consumer Sentiment: How people feel about their current financial conditions.

2. Current Economic Conditions: How people feel about current economic conditions in general.

3. The Index of Consumer Expectations: How people foresee things being in six months time.

The consumer will normally adjust spending habits based on how optimistic they are about the economy, pulling back when they feel things are souring to save more and vice versa. As we have discussed many times in previous lessons, the consumer and private consumption is such a large part of the US economy so because this indicator gives good insight into this segment it is closely watched by market participants.

It is important to understand here however that this is a survey based on people’s opinions and, unlike most of the other indicators we have studied up to this point, the individuals surveyed are not likely basing their opinions on hard data. It is for this reason that consumer opinion can be easily swayed by things such as short term spikes in gas prices, and why most market participants will use a 3 to 6 month moving average of the data to get a better picture of trends in consumer thinking.

As with many of the other leading indicators we have studied thus far, the Consumer Sentiment Index component is included in the Conference Board’s Index of Leading Economic Indicators making that component all the more important to the market.

Also as with all of the other indicators we have studied up to this point the best way to get a feel for how the market is going to react to this number under different scenarios is to follow the indicator in real time. With this in mind I will post a discussion piece in the comments section of this lesson on InformedTrades.com a link to which you can find in the description section of this video if you are watching on Youtube.

That’s our lesson for today. In our next lesson we are going to wrap up our discussion on Economic Indicators with a look at the Conference Board’s Index of Leading Economic Indicators so we hope to see you in that lesson.

As always if you have any questions or comments please post them in the comments section below, and good luck with your trading!