Introduction

The Consumer Confidence Index (CCI), benchmarked to a base scale of 100 on year 1985, was initially started in 1967. The reason behind choosing the year 1985 as a base year was due to neutrality of the index during the year. The index represents consumer’s opinion on ‘current conditions’ and ‘future expectations’ of the economy as a whole, where current condition weighs 40 percent of the index and future expectations remaining 60 percent of the index. Basically, increased consumer confidence indicates expansionary economy, whereas decreasing index exhibits slowing economy in terms of consumer spending, employment situation, retail market etc.

Calculation Methodology

The Conference Board, on monthly basis surveys 5,000 U.S. households based on five questions and generate respondents’ opinion on these questions. The questions that the survey comprises are:

• Current business conditions
• Business conditions for the next six months
• Current employment conditions
• Employment conditions for the next six months
• Total family income for the next six months

Basically, participants have to provide qualitative answers for each of the above questions. The responses may either “positive”, “negative” or “neutral.”

After collecting the data, a proportional value named as “relative value” is constructed for each responses. After each question’s positive responses are divided by the sum of the respective question’s positive and negative responses, the relative value for each question is finally compared against each relative value from 1985, i.e., the base year. Thus, this process of index calculation consequently facilitates to derive “index value” for each question and finally CCI after averaging the index values for all five questions.

Usage

Different sectors of economy like manufacturers, retailers, banks and government minutely monitor fluctuations in CCI which facilitates them in policy formulation and developing strategies to counter ongoing market conditions. Index increasing by more than 5 percent is generally consequential and exhibits a change in the direction of the economy, whereas index changes less than that of 5 percent are normally dismisses as inconsequential.

Gist

Amidst importance of CCI in terms of consumer spending and consumer sentiments, it is one of the most crucial and closely watch economic indicator. As CCI is believed to be an accurate derivation of economic scenario, it facilitates market participants to identify the direction of economy, i.e., whether the economy has been moving towards positive or negative direction.