What is Consumer Confidence and How Does it Affect You?

ould you say that you, as a Michigander, (and your family living there) are better off or worse off financially than you were a year ago? Depending on who’s asking, your answer could literally determine the economic policy for the next decade, so think closely.

The Consumer Confidence Index (CCI) is a prime factor used by the Federal Reserve-the organization that literally decides the value of money-to ascertain the state of the economy and the math is determined by something as simple as asking a few people a few questions. Answers about current conditions make up 40 percent of the index and expectations of future conditions make up 60 percent.

Most people assume the index is some super complex mechanism that only the foremost economists in the country understand, but the CCI is really just a survey of 5,000 United States households about how they feel about the economy. Friday, the University of Michigan and Reuters released their smaller, and usually more optimistic, version of the CCI. The above question is the first of five in the survey. The UM version only asks 500 people.

The UM survey released Friday showed that the final September reading came in at 78.3. The prior full month's was 74.3 in August. Bloomberg breaks it down like this:

“Rising property values, higher stock prices and a stabilization in the cost of gasoline may be combining to lift sentiment. At the same time, unemployment stuck above 8 percent and stagnant incomes are restraints for households, whose spending makes up about 70 percent of the economy.”

In December 2007, The Washington Post got figures from the CCI survey. When asked about their own finances only 43 percent of people responded not so good or bad. When asked about the overall state of the economy 69 percent of the same people said not so good or bad.

So how do those 500 households (or the 5,000 that respond to the survey by the Conference Board) decide what state the economy is in when they get the survey? The same way most people do: they watch the news, they talk to their friends and they read the papers. These people aren’t any different from you and me, they just get a call or a letter once a month asking for their opinion.

They aren’t economists or people with any particular knowledge, they just respond to what they’re being asked.

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