Key Takeaways: Understanding Consumer Sentiment

Consumer Sentiment
Daniel Liberto Updated Aug 26, 2019
Consumer sentiment is a statistical measurement and economic

indicator of the overall health of the economy as determined by consumer
opinion. Consumer sentiment takes into account an individual's feelings
toward his or her current financial health, the health of the economy in the
short-term and the prospects for longer-term economic growth.
Key Takeaways
Consumer sentiment is an economic indicator that measures how

optimistic consumers feel about their finances and the state of the
economy.
In the U.S., consumer spending makes up a majority of economic
output as measured by Gross Domestic Product (GDP).
The two numbers expressing consumers' feelings about the economy
and their subsequent plans to make purchases are the Consumer
Confidence Index (CCI) and the Michigan Consumer Sentiment Index
(MCSI).
Understanding Consumer Sentiment

Consumer sentiment developed as an economic statistic during the mid-
20th century and has since become a barometer whose results influence
public and economic policy.
In the U.S., consumer spending makes up a majority of economic output as

measured by Gross Domestic Product (GDP). As much as 70 percent of
GDP is driven by a consumer spending component, so the sentiment or
attitude of consumers goes a long way in gauging the health of the
economy. The other main drivers of GDP are business investments,
government spending, and net exports.
If people are confident about the future they are likely to shop more,
boosting the economy. In contrast, when consumers are uncertain about
what lies ahead, they tend to save money and make fewer discretionary
purchases. Gloomy sentiment weakens demand for goods and services,
impacting corporate investment, the stock market, and employment
opportunities, among other things.
Very bullish consumer sentiment can also be bad for the economy. When
people buy lots of goods and services, prices can rise significantly. To
stamp out inflation, central banks hike interest rates. Increasing the cost of
borrowing tends to slow economic growth and weigh on exports—higher
interest rates strengthen the value of currencies.
Recording Consumer Sentiment

The two numbers expressing consumers' feelings about the economy and
their subsequent plans to make purchases are the Consumer Confidence
Index (CCI), prepared by the Conference Board (CB), and the Michigan
Consumer Sentiment Index (MCSI), conducted by the University of
Michigan. Both indexes are based on a household survey and are reported
on a monthly basis.
Investors closely follow consumer sentiment indexes as they provide a

useful indicator of how much demand there is for the goods and services
produced by companies listed on the stock market.
Consumer sentiment indexes are lagging indicators because it takes people

several months to notice and feel the effect of changes in economic activity.
When analyzing the data, it is important to determine trends graphed out

over a longer time frame, such as four or five months. The media often
shines a light on changes from one month to the next or the last month
against the same month the prior year. Commentary that focuses only on
single period values, without looking at the deeper trend, is misleading.
According to the CCI, sentiment hit an all-time low in February 2009 and
a record high in May 2000.
Special Considerations
For many, the importance of the trends of consumer sentiment rests in the
fact that the consumer sentiment index originated in the middle of the
20th century when the concept of the "typical" consumer was more
homogeneous.
Acknowledging this historical fact, as well as potential sampling bias and

possible subjectivity across regions, the safe bet is to focus on trends
forming some sort of linear progression, whether upward or downward, or
the progression can hit a general plateau, which sometimes happens when
the economy shifts from stages in the business cycle.

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Consumer Sentiment

Daniel Liberto Updated Aug 26, 2019

Consumer sentiment is a statistical measurement and economic

Consumer sentiment is an economic indicator that measures how

Understanding Consumer Sentiment

In the U.S., consumer spending makes up a majority of economic output as

Recording Consumer Sentiment

Investors closely follow consumer sentiment indexes as they provide a

Consumer sentiment indexes are lagging indicators because it takes people

When analyzing the data, it is important to determine trends graphed out

Acknowledging this historical fact, as well as potential sampling bias and

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