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CCI & ICS – Consumer Confidence Yardsticks

13 January 2011 - News - Editor

Stock market investors have a variety of tools available to assist them in their investment decision making process. With consumer dollars being a driving force behind the economy of any country, the Consumer Confidence Index and the Consumer Sentiment Index provide valuable insight to investors, analysts and economists as to the state of the US economy and the progress of economic recovery.

Based on a survey of 5,000 US households, the US Consumer Confidence Index (CCI) is compiled and distributed on a monthly basis by the Conference Board. As the name suggests, the CCI is designed to use consumer spending activity, as well as consumer savings levels, to measure the degree of confidence consumers have in the economy. The Federal Reserve takes the CCI into account as part of its analysis when deciding upon interest rate changes. Moreover, stock market prices can be affected by CCI findings. Established in 1967, the Consumer Confidence Index is currently benchmarked to 1985=100 – a year chosen for its consistency, with neither significant highs nor lows. The data obtained via the household surveys is categorized by age, income and region, and details consumer attitudes toward the economy, along with their income and spending intentions going into the future. Forty percent of the survey is based on current opinions, while the remaining sixty percent of the survey looks at expectations regarding future economic conditions.

The Consumer Sentiment Index, or Index of Consumer Sentiment (ICS), compiled by the University of Michigan and Thomson Reuters, is benchmarked to December 1964=100 and is based on a minimum of 500 telephone interviews with consumers, during which 50 core questions are asked with the primary objective of measuring consumer confidence. The ICS measures were devised by Hungarian-born American psychologist George Katona in 1940 and still pursue the same objectives today, which include assessing consumer attitudes on the current business climate; gauging consumer sentiment regarding personal finance and spending patterns; promotion of the ability to understand motivating factors behind changes in the national economy; to create capability for forecasting changes in the economy; to provide the means of incorporating empirical measures of expectations into models of consumer saving and spending patterns; to facilitate the forecasting of future consumer spending behavior; and to determine the level of pessimism or optimism in the consumers' psyche. The ICS is valuable as an investment decision making tool as its findings have the ability to influence stocks, bonds and the value of the US dollar.

 


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