Consumer confidence can affect the economy.
Consumer sentiment indexes, also known as consumer confidence indexes, are reports on the degree of optimism that consumers have about the overall state of the economy, as well as their personal financial situation and its stability. This is used by a large number of banks, corporations and governmental entities to plan policy on a month-to-month basis.
Why Consumer Sentiment Matters
Consumer sentiment is considered important due to the fact that the level of confidence that consumers have about the stability of their incomes can be used to understand the overall trend of the economy. If consumer confidence is lower, consumers will spend less money, save more and cause the economy to shrink. If consumer confidence is higher, consumers will spend more, save less and cause the economy to expand. This can also be used to examine trends about which way the economy is heading, as opposed to single points of data. This was described by John Maynard Keynes as "animal spirits," due to the fact that at the largest scale consumers cannot be considered to be rational actors.
How Consumer Sentiment is Used
Consumer sentiment is used by a wide range of investors, businesses, banks and governmental organizations to plan their month-to-month and longer term actions. By examining the willingness of consumers to spend money, companies and investors can gauge the likelihood of selling product and adjust operations and investments accordingly. The government can choose to reduce or increase tax revenue. Banks can charge lower or higher interests depending on how much consumers are going to want to save versus how much they will want to take out loans.
What Composes Consumer Sentiment
Consumer sentiment indexes examine three things. The first thing examined is how consumers feel about their current financial situation. This will influence smaller purchases and their day-to-day life, affecting purchases like food and various luxuries. The second is about the state of the economy as a whole, which will affect their likelihood to save money against the future. The third is about their long-term financial situation, which works with their view on the state of the economy about saving money, in addition to helping determine whether they are likely to make major purchases.
How is Consumer Sentiment Determined
The University of Michigan Consumer Sentiment Index, the largest in the United States, gathers its information by gathering data from five questions through a monthly telephone survey. The questions cover the personal financial situation of now and of a year ago, personal financial situation a year from now, overall financial condition of the business they work for for the next year, overall financial condition of the business for five years, and current attitude toward buying household items.
Major Indexes
There are a number of major consumer sentiment indexes, both national and international. In the United States, the primary ones are the Consumer Confidence Index released by The Conference Board, The University of Michigan Consumer Sentiment Index, the Washington-ABC News Consumer Sentiment Index and the Consumer Confidence Average Index. Internationally, some major indexes include the Canada Consumer Confidence Index, the Indian CNBC-TV18 Boston Analytics Consumer Confidence Index and the half-annual Nielsen Global Consumer Confidence Index.
