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    Consumer sentiment is up

    Consumer sentiment rose in June, as states started to reopen, but most people are still feeling uncertain and pessimistic about the future.

    COVID-19

    Consumer sentiment is up – a little. Why does it matter?

    Samantha Fields Jun 12, 2020

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    With states reopening, Americans are starting to feel better about the economy than they have in the last couple of months, but only slightly.

    Consumer sentiment is higher now than it was in May, but overall, most people are still feeling pretty pessimistic about the economy and their own financial situations, according to the University of Michigan’s index of consumer sentiment.

    “The improvement is simply consumers recognizing that the economy is reopening, business conditions are improving and their employment is starting to improve,” said Richard Curtain, chief economist for the Surveys of Consumers. “But it is a long way from the kind of situation we would call consumers optimistic or confident of their economic future.”

    Confidence in the economy is nowhere near where it was before the pandemic began, and doesn’t look like it will rebound any time soon. Two-thirds of people surveyed said they are expecting the next year to be bad; about half are expecting a number of downturns over the next five years.

    “They don’t think this current situation is over,” Curtain said. “A lot of households have become behind in their mortgage payments or their rent payments or their other payments, and they’re facing difficult times ahead. I think most households, where they thought a year ago that the economy would continue to expand over the years ahead, now consumers are much more likely to expect … more volatile economic times during the years ahead.”

    There is a stark split, though, in how Republicans and Democrats are feeling.

    “We’re living in two different countries with two different views of what’s going on in the economy and in the world,” said Laura Veldkamp, a professor of economics and finance at Columbia Business School. “Republicans seem to report that the economy is doing great, that things are mostly as good as they were just before the pandemic hit … Democrats seem to think that we’re not in a good economy, and that it got a lot worse with the onset of the COVID-19 pandemic.”

    Overall, the level of uncertainty people are feeling about their own income and job prospects is higher than it’s been since 1960, according to Curtain. Confidence in the Trump administration’s economic policies, meanwhile, is lower than it’s been in the last four years — another bad sign for the recovery.

    “For consumers to be optimistic and confident about their future, they have to have that optimism and confidence about economic policy,” Curtain said. “If they had more confidence in current economic policies, they would be more willing to make these spending decisions thinking that the economy would certainly improve.”

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    The fact that so many people right now are feeling uncertain and pessimistic means they are much less likely to buy things that are not essential.

    “If I’m scared, I’m probably not spending,” Veldkamp said. “Our natural instincts as human beings in the face of fear is to gather everything we have together, and hunker down. And that’s really devastating for certain segments of the economy.”

    Even once the pandemic has passed, Veldkamp expects that fear is likely to linger to some degree.

    “We’ll still remember the fact that pandemics can happen and that’s going to influence our behavior for a long time to come,” she said. “There’s a good chance that years from now, you may still have a little bit of a queasy or adverse reaction to the idea of going to a packed stadium or concert hall.”

    And if the past is any indication, that could create a drag on the economy that will last for years.

    “People who were young adults and teens during the Depression… for the rest of their lives they behaved differently,” Veldkamp said. “We may see a similar sort of scarring that we bring forward with us the rest of our lives from people who’ve lived through this episode, and are old enough to remember it.”

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    Source : www.marketplace.org

    Consumer Confidence and Its Impact on the Markets

    Why is consumer confidence important? Learn how it impacts the financial markets, and how international investors can measure confidence.

    PORTFOLIO MANAGEMENT INTERNATIONAL INVESTING

    Consumer Confidence and Its Impact on the Markets

    •••

    BY JUSTIN KUEPPER Updated November 14, 2021

    REVIEWED BY CHIP STAPLETON

    FACT CHECKED BY HANS JASPERSON

    There is little question that consumer spending fuels most developed service-based economies, including the U.S., where it represents about 70% of gross domestic product (GDP).1 While measuring this spending is rather straightforward, predicting future trends can be very difficult, given the fickle and scattered nature of consumers on an aggregate basis.

    This article will look at what consumer confidence is, and how investors can use the indexed information to make better decisions.

    Key Takeaways

    Consumer confidence is the optimism consumers feel about the state of the economy and their personal financial circumstances.

    Consumer confidence is measured by using surveys to gather information and create an index known as the Consumer Confidence Index.

    The index is important for investors because it can indicate consumer spending and the effectiveness of monetary policy.

    How Is Consumer Confidence Measured?

    Economists solved the problem of measuring consumer confidence by developing what is now known as the Consumer Confidence Index (CCI). By questioning a statistically significant number of people residing within a given country using surveys, they aim to measure the degree of optimism that consumers feel about the overall state of a country's economy and their financial situation.2

    When consumers are confident in their futures, they tend to spend money and drive economic growth higher. When consumers aren't confident, they tend to save rather than spend, which restricts economic growth. Therefore, international investors pay close attention to the information gathered in these surveys since it can serve as a great leading indicator for the overall economy.

    How Consumer Confidence Surveys Work

    There are many different types of consumer confidence surveys used worldwide, but most of them operate similarly. Based on a probability-designed random sample, the surveys ask a series of questions designed to assess the consumer's current and future outlook to capture their views of the economy and financial situation.

    Questions typically cover things such as:

    Current business conditions

    Business conditions over the next six to 12 months

    Current employment conditions

    Employment conditions over the next six to 12 months

    Total family income over the next six to 12 months

    Participants are generally asked to answer each question as "positive," "negative," or "neutral," which are scored as 1, -1, and 0, respectively. Responses are added up to calculate a "relative value." This value is compared to a baseline "index value," which is often the initial value taken when the surveys first began.

    Finally, these index values are averaged to produce an aggregate value that's commonly reported.3 The CCI survey is updated monthly by The Conference Board.2

    The goal of consumer confidence surveys is to predict future consumer spending patterns, with the premise that more confidence leads to more buying and stronger economic growth.

    Consumer Confidence Around the World

    There are many different measures of consumer confidence used around the world. For example, companies such as Nielsen regularly survey consumers in roughly 60 countries, while many countries have various organizations that calculate their own indexes.4

    Some of the most popular indexes include:

    Canada: Conference Board of Canada Index of Consumer Confidence5India: Reserve Bank of India Consumer Confidence Index6Israel: Central Bureau of Statistics Consumer Confidence Index7Spain: Centro de Investigaciones Sociológicas Consumer Confidence Index8Britain: GfK Consumer Confidence Barometer9Global: Nielsen Global Online Consumer Survey10

    Using Consumer Confidence Data

    Consumer confidence data is an extremely important leading indicator for investors, given its ability to predict consumer spending patterns. These spending patterns can be useful predictors of everything from gross domestic product (GDP) growth to the effectiveness of monetary policy in combating low unemployment and inflation.

    Additionally, as researchers gather more information about consumer behavior, spending and saving patterns emerge that are based on economic and social circumstances, natural occurrences, political sentiments, and many other events. This information can greatly help investors anticipate market prices.

    Here are a few common uses:

    Leading indicator: Consumer confidence indices can be used as leading indicators for a broad economic turnaround, including resumed growth in GDP.Policy effectiveness: Consumer confidence can be used to gauge the effectiveness of a monetary policy, stimulus, or other measures used by regulators to jumpstart growth.Retail sector: Consumer confidence is particularly important in the retail and luxury goods industries since their revenues are highly correlated with spending patterns.

    Source : www.thebalance.com

    The Importance of Consumer Confidence Surveys

    Take a look at the roll Consumer Confidence Surveys play in indicating the health of the economy and inflation expectations

    3 Min Lesson 9 of 9

    The Importance of Consumer Confidence Surveys

    Consumer confidence surveys are key indicators into the overall health of the economy. When people feel confident about the stability of their incomes it influences their spending and saving activities.

    Therefore, reports such as Consumer Confidence Index (CCI) and University of Michigan Consumer Sentiment (MCSI) are of particular interest to traders since these reports include inflation expectations and outlooks for consumers.

    Consumer Confidence Index

    The CCI survey is conducted monthly and contains about 50 questions that track different aspects of consumer attitudes toward current and future business conditions, current and future employment conditions, and total family income for the next six months. This report is highly regarded by the Fed and can be a key factor in determining U.S. monetary policy.

    University of Michigan Consumer Sentiment

    The University of Michigan’s MCSI survey is conducted by phone and tracks consumer opinions of their own finances and the near- and long-term economy. Preliminary data is released on or around the 10th of each month, with final and complete data released on or around the first of the following month.

    Sector-Specific Reports

    While these reports provide a snapshot of consumer confidence as a whole, it can also be useful to relate consumer confidence to specific sectors of the economy, such as manufacturing versus non-manufacturing. In some instances, certain parts of the economy will perform better than others, and additional data can help traders to operate with a more sector-specific sense of consumer sentiment.

    One example of sector-specific report is the Philadelphia Fed Survey, which tracks the manufacturing sector. Other reports of similar nature include US Chicago PMI, Manufacturing, Services and Composite PMIs.

    Conclusion

    By gauging consumer confidence surveys against sector-specific performance, traders and the Fed alike can gain a broader understanding of the consumer’s view of the economy, while keeping an eye on the possibility of inflation.

    As you can see there are a number of factors to think about when trading U.S. confidence surveys but with a little insight and thorough preparation these numbers provide numerous opportunities for traders.

    Test your knowledge

    Consumer Confidence Surveys are of particular interest to traders since these reports include inflation expectations and outlooks for consumers.

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    In case you didn’t know, the CFA Institute allows its members to self-determine and report continuing education credits earned from external sources. CFA Institute members are encouraged to self-document such credits in their online CE tracker. CME Institute offers a variety of courses, webinars, and white papers to support your professional education.

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