Consumer confidence. What does a trader need to know?

Consumer confidence. What does a trader need to know?

The Consumer Confidence Index (CCI) measures how optimistic or pessimistic ordinary consumers are about their expected financial situation. In other words, the Consumer Confidence Index provides a snapshot of the actual economic conditions in which consumers find themselves. It is an important indicator that shows how consumers will stimulate the economy in the future. If the financial situation of the majority of consumers is difficult, it means that few people can afford to make large purchases, such as houses and cars. And this indicates that the cost structure is leading to a slowdown in economic growth or even a recession. If consumers are optimistic and their income will allow them to make large purchases, this will stimulate the economy in the future.

Don't forget that consumer consumption is about 75% of US GDP. An idea of how consumers feel and how that might affect their buying habits can provide valuable information in predicting what direction the economy might take. How does the economy relate to consumer confidence? If consumer confidence goes up, retail sales will follow as well. This could impact the rest of the economy as increased spending will allow businesses to expand, which could lead to hiring. The same principle works in the opposite direction as well.

The Index is calculated by surveying about 5,000 consumers. The survey is divided between questions about how people feel now and their future expectations. The survey is conducted monthly and contains about 50 questions tracking various aspects of consumers' attitudes toward current and future business conditions, employment conditions, and total family income over the next six months.

How to read the Consumer Confidence data?

The Index is analyzed concerning the mark 100. Suppose the Index is above 100 and rising. In that case, it indicates increased consumer confidence in the future economic situation, making them less likely to save and more likely to spend money on big purchases in the next six months. If the value is below 100 and falling, it indicates a pessimistic attitude toward future economic changes, which could lead to a tendency to save more and consume less.

The negative dynamics of the CCI will be accompanied by a fall in stock indices. The positive dynamics of the CCI will stimulate the growth of stock indices.

Let's look at a concrete example. On July 26 at 17:00 (GMT+3), the latest US Consumer Price Index data from the Conference Board was released. The data showed that last month the Index dropped from 98.4 to 95.7. First, the Index is below 100. Secondly, the dynamics are negative. Thirdly, the result was worse than expected.

Not surprisingly, stock indices started to decline after the news. This is one example of how this index can be analyzed.

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by Justforex, 2022.08.20

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