Consumer
What Is Consumer Confidence? Why It Predicts Spending
Consumer confidence measures how optimistic households are about the economy. It's a leading indicator of consumer spending, which drives 68% of U.S. GDP.
Consumer confidence measures how optimistic or pessimistic consumers are about current economic conditions and their expectations for the future. Since consumer spending accounts for approximately 68% of U.S. GDP, confidence levels directly predict economic trajectory.
Two Major Surveys
The Conference Board Consumer Confidence Index surveys 3,000 households monthly about current business conditions, employment outlook, and expected income. It's reported as an index with a base value of 100 (set in 1985). Values above 100 indicate above-average confidence.
The University of Michigan Consumer Sentiment Index surveys 500 households by phone, asking about personal finances and expectations for the broader economy. Released as a preliminary reading mid-month and a final reading at month-end.
Present Situation vs. Expectations
Both surveys break down into current conditions and future expectations components. For executives, the expectations component is more valuable — it's a leading indicator. When consumers expect the economy to worsen, they pull back spending before conditions actually deteriorate. A divergence between current conditions (still good) and expectations (declining) is an early warning sign.
How to Use Confidence Data
Consumer confidence is most useful at extremes and turning points. Very low confidence (below 60) typically coincides with or precedes recessions. A sharp decline (10+ points in a month) signals a demand shock. Steadily rising confidence supports revenue growth forecasts. Industry-specific impacts vary: luxury goods, travel, and real estate are more confidence-sensitive than utilities and healthcare.
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Frequently Asked Questions
What is a good consumer confidence reading?
The Conference Board index uses a base of 100 (set in 1985). Readings above 100 indicate above-average confidence. The index reached 144 before the pandemic and bottomed at 85 during the 2022 inflation surge. Readings below 80 have historically coincided with recessions. The absolute level matters less than the direction — a sharp multi-month decline is the strongest signal.
Does consumer confidence predict recessions?
Consumer confidence is a useful but imperfect recession predictor. Sharp, sustained declines in confidence often precede recessions, as consumers cut spending before the data confirms a downturn. However, confidence can drop due to political events, gas price spikes, or media sentiment without an actual recession following. Combine confidence data with the yield curve, jobless claims, and GDP growth for a more complete picture.
How does consumer confidence affect business planning?
Consumer-facing businesses should adjust inventory, marketing spend, and hiring plans based on confidence trends. Rising confidence supports aggressive forecasts; declining confidence calls for conservative planning. B2B companies are affected indirectly — their customers' customers are consumers. Capital expenditure decisions are less confidence-sensitive but still influenced by the economic outlook that confidence signals.