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Economy 101: Consumer Confidence Index

The latest Consumer Confidence Index report is released at 10:00 a.m. Eastern on the last Tuesday of each calendar month. These numbers are eagerly anticipated by Wall Street and the entire business community because the index is seen as a leading economic indicator of the relative health of the economy and is generally correlated to GDP growth.

What is the Consumer Confidence Index? It is the analyzed survey results of five thousand Americans, compiled by a highly respected non-profit organization called the Conference Board, and it is seen as the expression of the opinions and feelings of the average American consumer with regard to the present and future states of the economy.

The questions on the survey focus on respondents' opinions about current business and employment conditions, future business and employment conditions, and total anticipated household income over the next six months. From the tallied results the Conference Board determines an overall number that represents the confidence the American consumer has in current and future economic conditions. As with other indexes, CCI is given a base year as a reference point. By setting CCI to 100 for the base year of 1985, subsequent readings are easy to interpret at a glance. For instance, CCI was reported to be 25 in February 2009, down 75 points relative to the base.

Why is this important? Because how the average consumer feels about how things are going economically has proven to be an extremely accurate indicator of how the economy is going to go in the near future. If the average American consumer feels that things are going well and is optimistic about the future, then he tends to go out and buy lots of goods and services, which in turn tends to stimulate economic and GDP growth. On the other hand, if the American consumer feels that the economy is dismal, and sees no hope for the future, she tends to stay at home and hide her money in her mattress, which means that the demand for goods and services declines, and the economy slows.

Since the Consumer Confidence Index seems to be a relatively accurate predictor of the short-term spending habits of the American consumer, many large companies make major decisions based on what this survey says each month. If confidence is down, it might mean layoffs for thousands of people, but if confidence is up, then the manufacturing sector might raise their production levels to keep up with expected demand.

The fascinating thing about this index is that it is based not on the opinions of economists, but on the randomly sampled opinions of five thousand average Americans each month. It is an index based not on intelligent analysis of the state of the economy, but rather on how afraid the average Joe is about whatever has been dominating the popular culture lately. If gas prices are up a little but the media is focusing on it, then the CCI may drop significantly, even if the price hike is not economically significant. The Consumer Confidence Index says that if something scares or comforts the average American, then it is significant, regardless of its actual effects on the economy.

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