You've seen a business cycle before and understand that it is normal for the economy to go through periods of growth and contraction.
Economists use many different kinds of data and indicators to help them determine three things:
Assessing consumer confidence is one way or indicator economists describe what is currently happening.
Consumer confidence is an indicator that is compiled and assessed by a non-government entity, the Conference Board. It is a coincident measure--which is one that describes what is happening right now--of consumer sentiment with respect to the present situation of the economy and the six-month outlook for the economy.
Consumer confidence is highly sensitive to media and marketing influence on consumers' opinion formation, and as a result, it can be volatile and inconsistent over time intervals.
It is measured each month by the Conference Board, which is an independent economic research organization. The Conference Board surveys 5,000 households and asks them to respond "positive," "negative," or "neutral" to questions concerning current conditions and conditions in the next six months on the following:
Consumer confidence can actually tell us a lot about the economy. If consumers are confident, they continue to make purchases.
EXAMPLEFor instance, if you feel positively about your own situation and the economy, you are more likely to go on that summer vacation and continue to eat out at restaurants instead of saving for a rainy day.
These kinds of purchases and consumer demand are important because they keep firms profitable--and when firms are profitable, they continue producing and retaining employees. People with jobs have money to continue spending.
This drop-off in spending definitely starts to impact firms. Firms scale back on production, perhaps laying off employees or cutting hours. People without jobs do not have money to continue spending and the economy tends to get worse.
This is how macroeconomists look at consumer confidence what it indicates about our economy. Simply put, when confidence is rising, consumers spend money, indicating a healthy economy.
When confidence is decreasing, consumers are saving more than they are spending, indicating the economy is in trouble.
The Conference Board Consumer Confidence Index®, which had rebounded in December, increased again in January. The Index now stands at 80.7 (1985 = 100), up from 77.5 in December.
Consumer confidence a coincident indicator because consumers are responding to questions about their current attitudes about the economy and about recent or upcoming purchases, in addition to responding about what they think will happen in the next six months after the survey.
However, there are some issues with consumer confidence as an indicator.
It is a very popular indicator reported in the media, because it is something that viewers can relate to.
But really, how valuable is it as a predictor? Well, consumers are heavily influenced by the media and marketing. Therefore, in reality, it is a volatile and sometimes inconsistent indicator because of this.
This reinforces the idea that the more educated people are, as voters and citizens, the more there is consistent consumer confidence. However, there is no doubt that people are very much influenced by our media reporting.
EXAMPLEDuring a recent government debt ceiling crisis, which was highly covered in the media, the Conference Board that month reported a huge decline in consumer confidence. However, later on when it was released, in that exact same month, retail sales actually rose 0.4%. In this case, it turned out that what consumers did was quite different from how consumers responded they actually felt about the economy, as reported by the Consumer Confidence Index.
Source: Adapted from Sophia instructor Kate Eskra.