Measuring Consumer Confidence
This article was written by Samuel Phineas Upham
The concept of consumer confidence makes it sound like someone went door-to-door and asked people how confident their financial situation was. Anecdotal evidence for most people would indicate that many people might answer this question negatively. Everyone has bills, or is saddled with debt of some kind.
We don’t measure consumer confidence based on what people say. We measure it based on the demand that they create. The Consumer Confidence Index is a measurement of how optimistic consumers currently are about the economy. It can be an indication that consumers have a good amount of savings, and thus discretionary spending money.
There are some specific rules that govern how confidence is measured. The board will measure 5,000 U.S. household responses to questions dealing with: current business outlook, immediate future outlook, current employment outlook, immediate future of employment, and the estimated income of the family for the next six months. It’s a survey done monthly, and it weights current and future conditions on a ratio of 40% to 60%.
Once everything has been gathered, a “relative value” is calculated and assigned to each question. These data points are then compared to previous years, stemming from the benchmark year of 1985.
The data is then used by various economists and businesses to make predictions about sales goals and economic growth for the immediate future. A change of 5% or less is statistically negligible, but changes over 5% can signal major differences in the economy.
About the Author: Samuel Phineas Upham is an investor at a family office/hedgefund, where he focuses on special situation illiquid investing. Before this position, Samuel Phineas Upham was working at Morgan Stanley in the Media & Technology group. You may contact Samuel Phineas Upham on his Facebook page.