What is Consumer Sentiment?

December 9, 2022

What is Consumer Sentiment?

Consumer sentiment is a measure of consumer attitudes toward a country’s current and future economic health. 

Measured by survey, consumer confidence accounts for consumer opinions of their own financial health, how the economy is doing now and in the future, and other economic conditions such as interest rates, unemployment and stock market returns. 

Economists and investors consider consumer sentiment to be a useful economic indicator

Indexes of sentiment mostly rely on surveys to account for consumers’ feelings about their current financial situations and the short-term and long-term economic growth prospects.

Consumer Sentiment as an Economic Indicator

Policymakers and investing professionals look to consumer sentiment to gauge future consumer spending, which makes up a large portion of the US GDP.

The majority of economic output in the US is from consumer spending, accounting for as much as 70% of gross domestic product (GDP).

Consumer sentiment measurements are based on the idea that optimistic consumers will spend more while pessimistic consumers will save and budget more.

Because consumers are more likely to spend when they’re optimistic about future economic conditions, strong consumer confidence can be a positive indication of future economic health.

However, optimistic consumer opinions can occasionally cause the economy to overheat, leading to a high inflation rate.

When inflation is climbing, the Federal Reserve responds by raising interest rates to discourage borrowing and slow spending. This can potentially slow economic growth and can occasionally even lead to a market downturn or recession.

Measuring Consumer Sentiment

There are two main measures to record and analyze consumer attitudes. Each of the following indexes are viewed as signals of near-term consumer spending plans:

  • The U.S. Consumer Confidence Index (CCI), reported by the Conference Board
  • The Michigan Consumer Sentiment Index (MCSI), recorded by the University of Michigan

U.S. Consumer Confidence Index

The Conference Board administers a monthly survey of consumers to measure the overall attitude toward the current and future economic situation.

The CCI is released on the last Tuesday of each month and is closely monitored by policymakers and economists as a measurement of US economic conditions and consumers’ attitudes towards current employment and business conditions.

The survey includes questions about the rate of inflation, mortgage interest rates, the amount spent on monthly bills and subscriptions, household income, the standard of living and total debt held (student and auto loans, mortgages, credit card debt, etc.) in both the current market and in the future. 

Michigan Consumer Sentiment Index

The University of Michigan also calculates its index of consumer sentiment using a monthly survey of consumer expectations.

The preliminary report is released in the middle of each month with a final report released at the end of the month, covering survey respondents’ attitudes toward current conditions.

Consumer Sentiment vs. Consumer Confidence

The terms consumer sentiment and consumer confidence refer to the two main indexes of consumer expectations and feelings towards the economy and their own financial situation.

The Bottom Line

Consumers’ opinions towards their own personal finances, the health of the financial and labor markets and their outlook for future conditions including inflation expectations are viewed as strong economic indicators by financial professionals.

In 2022, consumer confidence has been declining due to lingering impacts of the COVID-19 pandemic, raging hot inflation and geopolitical conflict such as the war in Ukraine.

This is just one of many economic indicators that have been pessimistic of future economic health in the U.S.

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