Consumer confidence brightens: what does that mean?

By Ted Young
Business Services Manager

Many times we read or hear on the news that consumer confidence has improved and that it is one of the key indicators to watch regarding movements in the economy. Beyond the obvious, what does that mean? How does that affect my economy? To answer those questions we probably need to start with a brief definition of the Consumer Confidence Index (CCI).The CCI is a measure of consumer optimism toward current economic conditions. This index was based on 100 and is adjusted monthly on the basis of a survey of 5,000 households. The index gauges consumer opinion on both current and the individual’s perceived future economic circumstances. Forty percent of the index outcome is based on current conditions; the other sixty percent of the index is based on the consumer’s future expectations. The Consumer Confidence Index is closely watched because many economists consider consumer optimism an important indicator of the future health of the economy.
The index base of 100 is moved up or down by the responses received as a result of the survey. For example increased consumer confidence indicates economic growth in which consumers are spending money, indicating higher consumption. On the other hand decreasing consumer confidence implies slowing economic growth, and so consumers are likely to decrease their spending. The thought is that the more confident people feel about the economy and their jobs and incomes, the more likely they are to make purchases. Hence more consumer spending and consumption equals more demand for more products and services which should eventually lead to job growth. In theory this is how it works, but like everything else regarding economic theory, it is debatable.