What Is a Consumer Sentiment Index?

Definition and Example of Consumer Sentiment Index

A consumer sentiment index is a leading economic indicator that predicts changes in economic activity based on how likely consumers are to buy things, often in the next 12 months. Surveyors ask consumers if they are likely to spend money in the next few months to compile an aggregate view. Will people be buying cars and houses? Do they think they will get raises or that they might be laid off?

The best-known of the U.S. consumer sentiment indexes is based on the University of Michigan Surveys of Consumers, which have been conducted in some form or another since 1946.

Each month, the Michigan Consumer Sentiment Index and others are released to the public. Analysts and economists use the data to develop a view of the economy over the near future. If consumers are optimistic about the future, then they are likely to buy more, which is good for the economy. If they are pessimistic, they are more likely to save their money.

• Alternate name: consumer confidence index

For example, if a consumer sentiment index reports an increase from one month to the next, analysts take that as a sign that buyers are feeling more confident about their prospects, so they are more willing to make big-ticket purchases or spend money on wants, rather than needs. If an index shows a decline, then consumers are feeling nervous. They are less likely to commit to appliances or cars and more likely to save money in anticipation of future problems. Economic activity may suffer even if it otherwise looks like the economy is good.

How a Consumer Sentiment Index Works

Consumer sentiment is considered to be a leading index, meaning it shows what is likely to happen in the future. It helps economists and policymakers think about what retail demand and savings rates will be, and how that can translate to things such as prices and employment.

Different indexes are calculated in different ways. Some involve in-person interviews and others are conducted online. The Federal Reserve Bank of New York’s Survey of Consumer Expectations is an online survey of a rotating group of more than 1,000 panelists who are asked about inflation, household finance, the labor market, and the housing market.

The Conference Board’s Consumer Confidence Index began as a mail survey in 1967. Now, information is collected online, with 3,000 respondents each month answering questions about their current situations and what they see in the next six months for business outlook, their employment, and their family income.

What It Means for Individual Investors

Each month, data from the different consumer confidence measures is released. It usually has a small effect on the financial markets. Generally, traders view rising consumer confidence as a sign that there will be increased consumer spending. This is good for retailers and consumer products companies. However, higher consumer spending could lead to an acceleration in inflation.

If consumer confidence is falling, then the outlook for retail and consumer products companies is weaker. It could be evidence of an upcoming economic slowdown or of a decline in inflation. This is one factor among many for predicting financial markets’ outlooks.

Notable Happenings

Consumers are not clairvoyant, and news events can turn consumer sentiment in no time. In February 2020, for example, the Michigan Surveys of Consumers index stood at 101. In April, after the initial coronavirus lockdowns took effect, the index had slid to 71.8.

The pandemic is a good example of how consumer sentiment can change, as well as the way in which businesses and investors can use information about consumer sentiment to build forecasts. Consumers continued to spend money, but they switched to more goods for use at home, and they relied more on online shopping and order pickup rather than traditional in-person shopping.