Trading on the News: Consumer Confidence

In a modern US economy that is 70% based on consumer spending and consumption, the general consumer confidence level is important in understanding future economic growth. Will they spend confidently, or will they hesitate, worrying economic times may not be as favorable just around the corner?

The Consumer Confidence Index

The consumer confidence index is one of two measures used to determine the strength of the consumer economy. The Consumer Confidence Index is based on a survey of 5,000 households to determine their view on the economy. Respondents are asked about five different questions, including: the state of the current business conditions, business conditions six months in the future, current employment conditions and opportunities, employment opportunities six months in the future, and then finally, total family income for six months in the future.

Respondents answer each of the five topics with a choice of three answers: positive, negative, neutral. Then, once per month, aggregate consumer confidence is published for the markets to digest.

Michigan Consumer Sentiment Index

The Michigan consumer sentiment index is another study designed to track changes in consumer confidence. The Michigan Consumer Sentiment Index is conducted by the University of Michigan and is based on 500 telephone surveys of US residents in the contiguous 48 states. Despite a much smaller sample than the Consumer Confidence Index, the Michigan Consumer Sentiment Index is considered to be highly accurate and generally reflects the same changes in confidence as the CCI.

The Michigan Consumer Sentiment Index is based on a reading of 100 in December 1964. Thus, if the reading is 110, consumers are 10% more optimistic on average than they were in December 1964. The Michigan Consumer Sentiment Index, much like the Consumer Confidence Index, is released each month.

Making the Grade

As with most measures of confidence, the Consumer Confidence Index and Michigan Consumer Sentiment Index are most important at the top or bottom of a business cycle. During recessions, improving numbers mean a possible turnaround, as shoppers are more certain about their employment and income prospects. Likewise, a falling consumer confidence number at the start of a recession can ignite a recession nearly overnight, as a self-fulfilling prophecy emerges from low confidence numbers.

Each month, an estimate of consumer confidence is submitted by a number of economists familiar with the consumer confidence data. If consumer confidence comes out significantly higher than estimates, expect a short rally in equities, particularly retail and consumer staples stocks. Lower numbers, however, often drive broad-based sell offs, especially if the report is met with other negative news.

Fitting In

The consumer confidence data should be seen as a mid-level report that comes secondary to big releases like non farm payroll and GDP data. Coupled with other important data pieces, the consumer confidence index and numbers can either create strong waves on the markets, or it can leave with no noticeable noise whatsoever. As stated previously, the biggest market movements are generated when consumer confidence fails to live up to expectations. Meeting or exceeding consumer confidence numbers is rarely applauded, but simply expected.

Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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