The Consumer Confidence Index
The Consumer Confidence Index (CCI) is widely considered one of
the most accurate indicators of consumer confidence.
The Federal
Reserve looks closely at consumer confidence when determining
interest rates. Data for the index is collected from 5,000 consumer interviews that
include questions regarding assessments of current business
conditions, and expectations for future conditions, family wages,
and employment.
Given the report is conducted regionally, the results also tend
to have an effect on the values of local real estate areas.
Fundamental Analysis of the CCI
As the consumer confidence rises, so does propensity for consumers
to spend, boosting Gross Domestic Product and other performance
indicators. As future prospects regarding an economy improve, so
does the value of its currency.
A high CCI indicates a stronger currency.
A low CCI is a sign of a weakening currency.
A low CCI is indicative of lower consumer spending and
high interest rates, since high interest rates cause an economic
slowdown for everyone from big businesses to individual consumers by making it
expensive to borrow money. That is how CCI loosely correlates with interest rates.
Consumers are more likely to
save when the cost of borrowing increases to ride out dismal
economic performance. High employment levels, low interest rates,
and increased wages will usually have an encouraging effect on the
CCI, although if confidence is increasing too steeply it may be a
precursor to inflation.
It is crucial to note that lowering interest
rates does not necessarily lend itself to an immediate boost in
consumer confidence - the effect of changes in other
economic indicators lags in the CCI, it may take 6 to 8 months before
ramifications are reflected in spending.
Given that there are no hard figures collected in the formation
of the CCI - that is, raw data is just in survey form and
"planned spending" is recorded, rather than actual figures
- it is helpful to look at broad charts when using this indicator.
Month to month changes are not considered crucial enough to trend. A
3 ton 6 month Moving Average chart is recommended; a breach of the
MA can be considered significant movement.
The consumer confidence report, published by The Conference Board,
is released on a monthly basis on the last Tuesday of the month at
10:00 am EST.
