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Q: Consumer Confidence in the US-why does it matter? ( Answered,   2 Comments )
Subject: Consumer Confidence in the US-why does it matter?
Category: Business and Money > Economics
Asked by: gmt38-ga
List Price: $50.00
Posted: 06 Mar 2006 10:49 PST
Expires: 05 Apr 2006 11:49 PDT
Question ID: 704274
Why does the Federal Reserve think that consumer confidence is
important to our economy?  Why will an change in consumer confidence
make a difference to future prices, output and employment?

Request for Question Clarification by richard-ga on 07 Mar 2006 06:27 PST
I've started to put together an Answer to your question, but I'd
appreciate it if you'd confirm that you're not looking to Google
Answers to write a school assignment for you.

Will you accept an Answer that points to published authority regarding
the validity of consumer confidence as a leading indicator of future
economic behavior?

Looking forward,
Google Answers Researcher

Clarification of Question by gmt38-ga on 07 Mar 2006 09:12 PST
Nope, not a school assignment.  You made me chuckle though; I'm well
beyond my school years!  I am, however, an amateur (read:self-taught)
student of economics, and recently found Google answers to be a great
resource for answering my questions regarding the state of our
nation's economy.
As for your second question, I will accept any answer you provide.  I
can't seem to make heads or tails of why individual/consumer
confidence makes such a difference to the federal reserve.
Subject: Re: Consumer Confidence in the US-why does it matter?
Answered By: richard-ga on 08 Mar 2006 13:40 PST
Hello.  Thank you for your question, and for your patience while I
worked on this Answer.

Consumer confidence, sometimes also called consumer sentiment, is
commonly described as a leading economic indicator:
"An economic indicator is simply any economic statistic, such as the
unemployment rate, GDP, or the inflation rate, which indicate how well
the economy is doing and how well the economy is going to do in the
future. As shown in the article "How Markets Use Information To Set
Prices" investors use all the information at their disposal to make
decisions. If a set of economic indicators suggest that the economy is
going to do better or worse in the future than they had previously
expected, they may decide to change their investing strategy."
A Beginner's Guide to Economic Indicators

Thus, "[t]he Conference Board Consumer Confidence Index, which had
increased in January, declined in February. The Index now stands at
101.7 (1985=100), down from 106.8 in January. The Present Situation
Index rose to 129.3 from 128.8. The Expectations Index, however, fell
to 83.3 from 92.1 last month.
The Consumer Confidence Survey is based on a representative sample of
5,000 U.S. households. The monthly survey is conducted for The
Conference Board by TNS. TNS is the world's largest custom research

As to your question, why the Federal Reserve should think that
consumer confidence might make a difference to future prices, output
and employment, Google Scholar is a good place to discover academic
research into the issue.

"At least since the work of John Maynard Keynes, economists have
pondered the ways in which consumer and investor sentiment?what Keynes
(1936,Chapter 12) referred to as ?animal spirits??might influence the
real economy. Today, the outcome of monthly consumer confidence
surveys provides steady fodder for the business and financial press
and is treated as an important piece of economic information. In the
New York Times alone, more than 15 articles about consumer confidence
and its potential impact on the economy appeared between July 2002 and
June 2003. Consumer confidence is often cited by Federal Reserve
Chairman Alan Greenspan as a key determinant of near-term economic
growth (for example, Greenspan, 2002)."
Consumer Confidence and Consumer Spending

The same article reaches a somewhat fuzzy conclusion:
"Measures of consumer confidence do forecast future changes in labor
earnings and non-stock market wealth, but measures of consumer
attitudes appear to be directly related to future consumption growth,
not just indirectly through their predictive power for household
income or wealth. Carroll, Fuhrer and Wilcox (1994) rule out other
explanations for why sentiment forecasts aggregate spending growth,
including a simple model of habit formation. The question of why
consumer attitudes help predict future consumption growth remains a
puzzle....  Other researchers have explored the relation between
consumer confidence and broader measures of economic activity. 
Mishkin (1978) focuses on the interrelation between household
investment and consumer sentiment. Matsusaka and Sbordone (1995) find
a relation between the Michigan Index of Consumer Sentiment and GDP
growth. Of course, the results in these papers and those presented
here raise the question of whether confidence measures serve mainly as
proxies for some other fundamental variable that contributes to
business cycle fluctuations. The difficulty with assessing this
concern is that we don?t know what those other fundamentals might be."
Id. at 20.

Here's another study, looking at the same issue country-by-country:
[the .pdf link didn't work for me, so I've also given you Google's html verions]
"Consumer confidence indices have some ability to forecast the
evolution of economic activity, provided that both their coincident
nature is taken into account and that a number of data-coherent
parameter restrictions are imposed ....  These results appear to be
fairly robust..."

Returning to plain English, it's fair to say that consumer confidence
is a fair indicator of how freely consumers will spend in the future. 
So it follows that pricing, output and employment will be affected by

Please browse through these sources and get back to me, via Request
for Clarification, with anything further you might need.  We're not
done here until you're satisfied!  I would appreciate it if you would
hold off on rating my answer until I've had a chance to provide any

Search terms used:
[given above]

Google Answers Researcher
Subject: Re: Consumer Confidence in the US-why does it matter?
From: canadianhelper-ga on 06 Mar 2006 10:56 PST
Change in consumer confidence is used to gauge where the economy might
be going and therefor adjust monetary/fiscal policy to hedge those

The Index of Consumer Confidence measures how people feel about the
United States economy. It is issued monthly by The Conference Board,
an independent economic research organization, and is based on 5,000
households. [1] Such measurement is indicative of consumption
component level of the gross domestic product. The Federal Reserve
looks at the CCI when determining interest rate changes, and it also
affects stock market prices.

The index started in 1985 at 100 and is normalised based on the
Consumer Confidence level when it began. The Conference Board declares
a recession whenever there are two or more consecutive quarters with
confidence levels below 100. Another well-established index that
measures consumer confidence is that University of Michigan Consumer
Sentiment Index, run by University of Michigan's Institute of Social

For the last press release we learned the
following...this will help gauge where to move monetary/fiscal
Consumers' appraisal of overall current conditions held steady in
February. Those claiming conditions are "good" edged up to 26.2
percent from 25.9 percent. Those claiming conditions are "bad" edged
down to 15.5 percent from 15.9 percent. Labor market conditions,
however, were mixed. Consumers saying jobs are "plentiful" increased
slightly to 27.3 percent from 27.0 percent, while those claiming jobs
are "hard to get" moved up to 20.7 percent from 20.3 percent.

Consumers' outlook for the next six months was much bleaker in
February than in January. Those expecting business conditions to
worsen increased to 11.1 percent from 10.5 percent, while consumers
expecting business conditions to improve declined to 16.0 percent from
17.9 percent.

The outlook for the labor market was also less favorable. Consumers
expecting fewer jobs to become available in the coming months
increased to 20.0 percent from 15.2 percent in January, while those
expecting more jobs declined to 13.4 percent from 13.6 percent. The
proportion of consumers anticipating their incomes to increase in the
months ahead eased to 18.6 percent from 19.9 percent last month.
Subject: Re: Consumer Confidence in the US-why does it matter?
From: hardtofindbooks-ga on 08 Mar 2006 01:03 PST
Hi gmt38

here's some reading for you while you wait

Inside Consumer Confidence Surveys

A technical analyis from the Bank of Canada with a contrary opinion

A Recent Speech from an Australian Viewpoint

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