Consumer Sentiment

What Is Consumer Sentiment?

Consumer sentiment is a statistical measurement of the overall health of the economy as determined by consumer opinion. It takes into account people's feelings toward their current financial health, the health of the economy in the short-term, and the prospects for longer-term economic growth, and is widely considered to be a useful economic indicator.

Consumer sentiment emerged as an economic statistic during the mid-20th century and has since become a barometer that influences public and economic policy.

Understanding Consumer Sentiment

In the U.S., consumer spending makes up a majority of economic output. As much as 70% of gross domestic product (GDP) is driven by a consumer spending component, so the sentiment or attitude of consumers goes a long way in gauging the health of the economy. The other main drivers of GDP are business investments, government spending, and net exports.

If people are confident about the future they are likely to shop more, boosting the economy. In contrast, when consumers are uncertain about what lies ahead, they tend to save money and make fewer discretionary purchases. Gloomy sentiment weakens demand for goods and services, impacting corporate investment, the stock market, and employment opportunities, among other things.

Very bullish consumer sentiment can also be bad for the economy. When people buy lots of goods and services prices can rise significantly, leading to an unwelcome rise in inflation. To stamp out inflation, central banks hike interest rates, which leads to an increase in borrowing costs for both consumers and businesses. This tends to slow economic growth and weigh on exports — higher interest rates strengthen the value of currencies.

Recording Consumer Sentiment

Two key measures that express consumers' feelings about the economy and their subsequent plans to make purchases are the Consumer Confidence Index (CCI), prepared by the Conference Board (CB), and the Michigan Consumer Sentiment Index (MCSI), conducted by the University of Michigan. Both indexes are based on a household survey and are reported on a monthly basis.

Investors closely follow consumer sentiment indexes as they provide a useful indicator of how much demand there is for the goods and services produced by companies listed on the stock market.

Important

Consumer sentiment indexes are lagging indicators because it takes people several months to notice and feel the effect of changes in economic activity.

When analyzing the data, it is important to determine trends graphed out over a longer time frame, such as four or five months. The media often shines a light on changes from one month to the next or the last month against the same month the prior year. Commentary that focuses only on single period values, without looking at the deeper trend, is misleading.

According to the CCI, consumer sentiment hit an all-time low in February 2009 and a record high in May 2000.

Special Considerations

For many, the importance of the trends of consumer sentiment rests in the fact that the CCI originated in the middle of the 20th century when the concept of the "typical" consumer was more homogeneous.

Acknowledging this historical fact, as well as potential sampling bias and possible subjectivity across regions, the safe bet is to focus on trends forming some sort of linear progression, whether upward or downward, or the progression can hit a general plateau, which sometimes happens when the economy shifts to different stages in the business cycle.