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The Powerful American Consumer
America is a nation of consumers. Consumption makes up a whopping 70% of US Gross Domestic Product. Since it's such a big part of our economy, it's important to study factors which impact consumption. One mechanism economists use to get an understanding on consumption is the Consumer Confidence Index
The Consumer Confidence Index is an index which shows the confidence US consumers have in businesses, their employment and own income. It's an attempt to quantify how optimistic consumers are about the future. Consumers who are more confident about the future are likely to spend money they have rather than squirreling it away for a rainy day. If a consumer expects more money is coming in the near future, they won't have a problem with spending money today. The more likely consumers are to spend money, the more confidence they have and the higher the Consumer Confidence Index.
The index number stems from the results of a survey given to consumers by an organization called The Conference Board. This index is released each month. The Conference Board surveys several thousand households each month and has been publishing the number since 1967.
Calculating the Index
The questions in the survey include two questions on the present situation of the economy and three questions regarding future expectations. The present situation questions are about the current business conditions and current employment conditions. The expectations questions are about business conditions, employment conditions and total family income during the next six-month period.
Survey responders can answer positive, negative or neutral to each question. The total number of positive responses are then divided by the total number of positive responses plus negative responses. This gives a relative value of positive sentiment. Then this number is divided by what the number was in 1985. Why 1985? That year was seen as a neutral year during the business cycle. It wasn't really an economic peak nor valley. The middle-of-the-road benchmark would then be good for future comparisons. The five indexed values are then averaged in order to come up with the Consumer Confidence Index reading for that month.
Take the Jones family for example. The family is a little wishy-washy about what's currently happening economically but they have a lot of faith in the future. If the Jones family replies neutral to the first two questions about their current situation and then positive for the future expectations, the impact to the Consumer Confidence Index would be positive overall.
The Consumer Confidence number has the power to rile the US stock market. With consumption such a large percentage of GDP, investors look to the number to provide insight into the American psyche. When confidence is high, investors are more optimistic about the future growth of the US economy. When it's low, investors are more cautious.
In terms of the macroeconomic picture, consumer confidence can be used as a gauge of aggregate demand. Confidence coincides with consumers' intent to spend. If consumers intend to get out there and spend a good chunk of their money, that intent to spend translates to increased demand for goods and services. Aggregate demand is the total demand for all end-user goods and services in an economy. It's all the buying power that's currently being put to use right now (all the stuff that's being bought at this point in time).
When there is an increase in consumer confidence, there is a shift in aggregate demand. Aggregate demand increases and causes a shift to the right of the aggregate demand curve. If not complemented by increased aggregate supply, the shift in the demand curve would lead to increased prices for goods and services.
The Consumer Confidence Index is an index which shows the confidence US consumers have in businesses, their employment and own income. The index number stems from the results of a survey given to consumers by an organization called The Conference Board. The questions in the survey include two questions on the present situation of the economy and three questions regarding future expectations. Aggregate Demand is the total demand for all end-user goods and services in an economy.
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