What is consumer confidence, and why does it matter?
Experts use several metrics to gauge the health of the U.S. economy, including gross domestic product (GDP), unemployment, inflation, and consumer confidence.
Consumer confidence measures how optimistic or pessimistic consumers feel about the overall state of the economy and their own finances. It's important because it reflects people's willingness to spend money, which is a key driver of economic growth. And this figure has far-reaching implications — it can influence stock prices, business decisions, and economic policies.
Learn more about how consumer confidence is tracked and why it matters.
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Consumer confidence is an economic indicator that measures how consumers feel about the health of the economy and their personal financial situation.
When consumer confidence is low, it indicates greater economic uncertainty among individuals. As a result, they tend to cut back on discretionary spending and focus on saving instead.
On the other hand, when consumer confidence is high, people are more likely to make major purchases, invest, and borrow money — all of which help boost economic activity.
The Conference Board — a nonprofit research organization — measures consumer confidence through a monthly survey that asks a sample of consumers questions about current economic conditions, expected future conditions, and their personal finances. This data is then aggregated into a single number, called the Consumer Confidence Index (CCI).
Additionally, the University of Michigan conducts its Surveys of Consumers monthly to formulate its own Index of Consumer Sentiment (ICS).
These figures are used by economists, policymakers, businesses, and other stakeholders to gauge where the economy is headed and guide their decisions.
Consumer confidence has been trending downward over the last year. In fact, according to the latest report from The Conference Board, consumer confidence declined for the fifth consecutive month in April, falling to levels not seen since the onset of the COVID pandemic.
Stephanie Guichard, senior economist, global indicators at The Conference Board, noted in a recent statement that this decline is largely due to a drop in consumer expectations related to business conditions, employment prospects, and future income.
In fact, more than 32% of respondents expect fewer job opportunities in the next six months — nearly the same percentage as in April 2009 during the Great Recession.
Consumer confidence may not have a direct impact on your wallet, but it can influence you and your finances in subtle, but important, ways.
When consumer confidence is higher and spending increases, it can lead to higher inflation if the supply of goods can't keep up with demand. In turn, your money's purchasing power is reduced. In other words, it costs you more money to afford the same everyday essentials.
Read more: How to protect your savings against inflation
Meanwhile, shaky consumer confidence can lead to a more volatile stock market. Investors often look to this index to get a sense of how certain stocks will perform and make decisions accordingly, which could have an impact on your portfolio — at least in the short-term.
Consumer confidence also influences economic policy. For instance, shifts in consumer confidence can help the Federal Reserve assess whether the economy is overheating or slowing down too much. It may decide to adjust the federal funds rate to encourage more spending or saving, depending on what's needed to keep the economy running smoothly. When the Fed adjusts this rate, interest rates on savings and credit products follow suit, impacting how much it costs to borrow money and how much you can earn on your bank account balances.
Ultimately, it's a good idea to keep your eye on consumer confidence. It can help you anticipate shifts in the economy that might affect your job, investments, or spending plans. But remember, it's one of many indicators that experts rely on, and it doesn't always tell the whole story.
Related: What is a yield curve, and what can it tell us about the future of interest rates?
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