Consumer Confidence

Consumer confidence is an economic indicator that gauges consumers’ perception of the economy. Based on customer purchasing behavior, the indicator ascertains if the perception is optimistic or pessimistic. It is an indirect indication of a country's financial health. A conference board determines consumers' perceptions by conducting surveys.

Based on the surveys, a Consumer Confidence Index (CCI) is created. The survey sheds light on consumers’ plans concerning purchases and expenses. A booming economy exhibits extravagant buying behavior. However, during recessions, customers have less confidence in the economy and, in turn, limit their spending.

• Consumer confidence is an economic indicator. Based on surveys, an index is created by a conference board. The survey reveals the public perception of the country's economic health.  
• The survey comprises questionnaires that are answered by three thousand households. In the US, CCI surveys are conducted every two months.
• In 1916, the US established a conference board. It is a global research association that uses practical knowledge to improve society.
• The CCI baseline is 100 points recorded in 1985. Current data is compared to the baseline.  

Consumer confidence refers to buying behaviors and expense planning. It reflects market sentiments—what citizens think about their country's economy—whether they anticipate future growth or decline.

For example, when a country faces a financial crisis, there is a substantial rise in inflation, unemployment, illiteracy, minimum wage jobs, and stock market instability. In such scenarios, customer confidence is very low—people avoid buying new things. Moreover, during crisis, the threat of economic recession looms large—the banking system collapses.

In response to crises, a conference board takes a survey to create an index of Customer Confidence Index (CCI). CCI reflects customer confidence data, highlighting customers’ life choices and market demand. In contrast, a booming economy exhibits strong market demand, extended supply, and extravagant buying behaviors.

CCI is based on a five-question survey. The survey is conducted on a population of three thousand households. For example, China’s consumer confidence report for 2021 reflects the country’s suffering (due to Covid-19) and how CCI is still recovering.

By August 2022, customer confidence in the US rose. Before August 2022, US customer confidence declined for three consecutive months. However, from a July figure of 95.3, US CCI rose to a record 103.2 by August.

• The consumer confidence survey reveals people's opinions—on future expenses and plans.
• It describes how citizens perceive the future of their country.
• Not just numbers and empirical data, customer confidence data also highlight people's opinions and attitudes.
• CCI depicts buying behaviors of citizens; this is crucial information for both businesses and the government.

Let us look at customer confidence examples to better understand the concept.

Example 1

Kyle and Jenny met at a small eatery in Paris. Both were working professionals; Jenny came for a vacation, and Kyle was there on business (office project). Kyle and Jenny belong to two countries—Kyle was from the UK, and Jenny was German. Both hailed from different cultures—different landscapes, traditions, cultures, and societies.

While they were getting to know each other, Kyle asked Jenny about her plans and what her country was like. In response, Jenny reveals she’s on vacation and plans to buy a new car when she returns. In addition, she mentions her recent promotion.

Jenny adds that her country is beautiful; she goes on about the landscape, the meadows, how most Germans have jobs, and her father’s new business. Next, Jenny educates Kyle on Germany's booming economy and upward stock market trends. Finally, Jenny interjects about her brother's new laptop and announces her ambition to buy an apartment in New York.

Kyle is amazed and wishes her the best.

Jenny is optimistic about her country. She conveys positive buying behavior and incessant product demand—Germany’s customer confidence sounds healthy.

Example 2

Later in the conversation, Jenny asks Kyle about Kyle's country.

Kyle elaborates that the job market in his country (UK) is down; and that there are hardly any vacancies. Kyle further cited the ongoing war and protests for the recent troubles.

Kyle explained to Jenny how the UK stock market had crashed. Kyle was struggling; he was forced to take overtime, or else he could lose his job. Kyle was burdened with loans. Kyle was anxious and told Jenny that the future looked bleak for him. Kyle was expecting a recession anytime.

In answer to Jenny's queries about Kyle's purchases, he retorted that he could not afford to buy anything substantial.

Kyle's take on his own country and economy reflects a certain pessimism. As a customer, his confidence in the national economy is low.

• Customer confidence reflects people's opinions on a nation's economy. Consumer sentiment, on the other hand, depicts citizens' perspectives on personal conditions.
• CCI keeps changing rapidly. In contrast, consumer sentiment is measured over one to five years (expectations).
• Consumer confidence surveys recruit new subjects. In contrast, consumer sentiment surveys are repeatedly conducted on the same subjects—up to 40% of respondents are repeated.
• The consumer confidence definition elaborates on the impact of customer confidence on labor markets, unemployment, and demand. But on the other hand, consumer sentiment is all about finance at an individual level; career planning, long-term goals, short-term goals, individual purchases, etc.

Let us look at an example. In 1967 a customer confidence survey was conducted. Then, every two months, a questionnaire was given to the subjects. By 1977, questionnaires were sent every month.

The questionnaire had five questions -

• Two questions were about the present economic scenario.
• Three questions were about future conditions and public anticipations.

CCI is declared on the last Tuesday of every month and is considered the most important economic indicator, especially in the US. The baseline for measurement is taken from 1985—100 points.

People’s spending habits and expense decisions directly affect supply and demand. For example, people make multiple purchases in a booming economy—the entire demand-supply chain prospers. In contrast, if people save more, it slows the economy down. It can even cause a recession.

This article has been a guide to What is Consumer Confidence. We explain its importance, examples, effect on the economy, & comparison with consumer sentiment. You can learn more about it from the following articles -

• Leading Indicators
• Economic Stability
• Indexation