By: DailyForex.com
The release of CB Consumer Confidence data for May is due out on Tuesday. What is this report and why is it important?
The Consumer Confidence Index (CCI) is an indicator designed to measure consumer confidence. It is published by the Conference Board and released at 10 a.m. ET on the last Tuesday of every month. The Conference Board is a global, independent business membership and research association working in the public interest and the survey is conducted by the Nielsen Group, a global performance management company that provides a comprehensive understanding of what consumers watch and buy. The CCI is highly regarded by investors and the Federal Reserve. The Index was down in April from its March numbers and now stands at 94.2 (1985=100).
In the United States the CCI is based on 5,000 households and is a gauge of the consumption component level of the gross domestic product, often used by the Federal Reserve when determining interest rate changes.
Survey Impacts Market Moves
Although it is a highly subjective survey, the report can have a major impact on investor decision making. When the economy is falling behind estimates, a strong consumer confidence report can encourage investors to purchase equities. A negative CCI can keep them away from markets altogether.
The CCI has shown that rising consumer confidence trends with rising retail sales, personal consumption and expenditures and that contented consumers who feel their standard of living is improving are more inclined to make large purchases such as a new home or car. When confidence drops, consumers tend to hold their money close, stashing it in savings accounts or government notes.
The CCI can be misleading of course. Because the average person is not an economist and takes most of his/her information from media reports, even the smallest bit of news may be interpreted as being a major market mover and may tilt his/her economic outlook out of proportion. For example, an announcement of a gas price change may be viewed by the consumer as an indication of a general economic condition and he/she will make market decisions based on this information, not realizing that gas prices represent only 5% of his/her overall expenses and should not be used as a reason to make a major market choice.
Limited Sample
The CCI uses a relative small sample size (only 5,000 households) and the survey results are known to contradict other indicators, such as GDP and the Labor Report. To compensate for the subjective nature of the CCI and its relatively small sample size, some economists look at moving averages of between three and six months for consumer confidence figures before making a prediction of a major shift in sentiment. Others feel that index level changes of at least five points are necessary before calling for the reversal of an existing trend.
However, it is the monthly CCI report that continues to be used as the main gauge for consumer sentiment and historically, it has been a good predictor of consumer spending as well as the gross domestic product (consumer spending makes up more than two-thirds of real GDP). Since the spending ability of the average consumer is the most important determinant of an expanding economy, and since the CCI report is one of few indicators that reach out to and report on the average U.S. household, it seems most likely that it will continue to be used as the major consumer confidence benchmark for a long time to come.