In the last chapter, I listed the most important macroeconomic publications that describe the current state of the economy. Obviously, investors are very interested in the current market conditions. What is more valuable though, is to predict what is going to happen in the future. Such forecasts are always risky since the probability of making a mistake or wrong prediction is pretty high. Despite that, a few institutions around the world try to forecast the future behavior of consumers. This type of reports researches the level of consumer confidence or sentiment. The two most important publications researching future consumer behavior are listed below.
University of Michigan Consumer Sentiment Index
The University of Michigan Consumer Sentiment Index is prepared in the form of a compilation of questionnaires of 500 American households. Respondents answer a number of questions regarding the condition of their personal finances. An increasing indicator shows a higher level of satisfaction of American households. For investors, this information means that consumer spending might increase, which in turn will positively affect the financial performance of companies. A higher reading of the index is good news for both the equities and currency markets. The University of Michigan Consumer Sentiment Index is published monthly by the University of Michigan. The reading is published twice a month, first around the 15th of each month. At the beginning of a new month, the full report is published for the previous month. The index is normalized to have a value of 100 in December of 1964.
The person who started the whole thing was George Katona in the late 1940s who developed the firtst consumer confidence measures. Theses days, the index is a representative survey, which is based on phone household interviews. Out of these questionnaires, the index is developed. The University of Michigan Consumer Sentiment Index is regarded very high by analysts since it pretty accurately indicates the future behavior of consumers and the trend of the economy. The Index of Consumer Expectations (a sub-index of ICS) is included in the Leading Indicator Composite Index published by the U.S. Department f Commerce, Bureau of Economic Analysis.
The University of Michigan Consumer Sentiment Index’s main goals are to:- assess consumer attitudes on the business climate, personal finance, and spending in the short-term; create capability for understanding and forecasting changes in the national economy; provide means to directly incorporate empirical measures of consumer expectations into models of spending and saving behavior; forecast the economic expectations and the future spending behavior of the consumer; and judge the level of optimism/pessimism in the consumer’s mind.
The index describes three main areas: (1) how consumers fel about their personal economic situation, (2) how consumers feel about the economy as a whole in the short-term, and (3) how consumers feel about the economy as a whole in the long-term.
Conference Board Consumer Sentiment Index
The structure of the Conference Board Consumer Sentiment Index is similar to the one published by the University of Michigan. The Conference Board publishes its index the last Tuesday of each month at 10:00 AM. The index started in 1985 with a base of 100 and it is measured since then. The reaction of the market is identical to that of the University of Michigan’s index. Obviously, the higher the reading, the higher the optimism and confidence of consumers. A higher reading of the index has a positive effect on the local currency and equities. Still, the University of Michigan’s index is regarded higher by investors and can cause bigger swings on the currency and equities markets. The result of the index is based on a monthly survey that asks 5,000 respondents to evaluate the prospects for the economy in the future. Opinions on current conditions make up 40% of the index, with expectations of future conditions comprising the remaining 60%. Respondents are asked a series of questions regarding:
1. current business conditions
2. business conditions expected for the next six months
3. current employment conditions
4. employment conditions expected for the next six months
5. total family income expected for the next six months
Survey participants are asked to answer each question as “positive”, “negative” or “neutral". Based on the answers, the index is prepared.
These indicators measure the confidence of consumers so they can predict future consumption. Other measures of consumption include the housing market publications but I will describe those in the next chapter.
Feel free to contact me with any question or comments.
Adam Narczewski
X-Trade Brokers Dom Maklerski S.A.
adam.narczewski@xtb.pl