Consumer Confidence Index (CCI), i.e. an indicator of consumer confidence

In the current economy, consumption is one of the main engines of growth. There are many indicators that measure the development of consumer sentiment. In this text, we will explain what the so-called CCI, i.e. indicator, is Consumer Confidence Index. For fans of technical analysis, let's make a correction right away - in the case of this text, the abbreviation CCI is not the Commodity Chanel Index (a popular indicator often used on commodity markets and elsewhere).

CCI is prepared by the Conference Board and measures consumer sentiment and expectations regarding their financial situation. According to this measure, if consumers are optimistic, they are more willing to consume more, which should stimulate economic growth. In turn, when consumers are pessimistic about their financial situation, they may limit their spending, which may slow down economic growth and even contribute to recession in the economy.

How the Consumer Confidence Index is created

The CCI index is published monthly on the last Tuesday of each month. It is treated as one of the most reliable indicators determining the mood of American consumers. To put it simply, it is treated as a barometer that determines the "health" of the United States economy. This is because consumption is responsible for the majority of economic growth. For this reason, many investors, financial journalists and analysts carefully look at the Consumer Confidence Index.

As we have already mentioned, CCI is based on surveys completed by selected 3000 correspondents. The indicator itself was created in 1967 and was initially published every two months. However, after 10 years, monthly publication of research results was introduced. The survey includes, among others: two questions about current economic conditions and three about the future.

CCI is based on questions regarding:

• assessment of the current macroeconomic situation,
• forecasts for the coming months,
• purchasing decisions made.

The final part of the CCI survey looks at predictions for the next 12 months. Respondents are asked about their expectations regarding interest rates and stock prices. Let's take a look at each section of the survey mentioned.

The Presten Situation Index, i.e. opinions about today's situation

The first two passages concern the so-called The Present Situation Index, where respondents answer questions about:

• current business conditions,
• situation on the labor market.

For the first question, the survey contains the following answers: "good", "bad" i "normal". As for the second question, the respondent must determine whether there are many job offers on the labor market or on the contrary.

It is therefore worth carefully examining how consumers view the labor market, as it may have a significant impact on purchasing behavior. The uncertainty of tomorrow or the difficulty of finding a job may cause them to postpone non-essential purchases until the future. This may therefore be a bad signal for discretionary goods.

The Expectations Index – an important component of the CCI index

The Expectations Index is a set of questions about forecasts for the next 6 months. The first question is opinion on business conditions. There are three answers to choose from: "better", "worse" and "without changes". If consumers expect conditions to improve, they may be a bit more willing to make purchases. Moreover, improving conditions for companies means a greater chance for increased investment, greater employment and an increase in wages.

The second question concerns expected condition of the labor market in 6 months. The respondent can answer in a similar way to the previous question, i.e. that he expects more, fewer or the same number of job offers. It is best when responders expect improvement in the labor market. Then there will be a greater demand for labor, which may result in an increase in wages. Higher wages also mean greater consumption in the future, because the savings rate rarely increases with higher earnings. This is called cost of living inflation.

The last question about the future is income forecast for the next 6 months. It is worth remembering that people often succumb to the illusion of money. This means that they focus on the nominal change in their income, not the real change. This is understandable, because otherwise the consumer would have to spend time constructing his shopping basket and measuring price changes. He would then estimate his inflation and be able to assess whether his income had actually increased. However, in this case, the respondent only assesses whether his nominal income will change. There are three answers to choose from: "will increase", "will decrease" and "without changes". It is obvious that if a consumer expects his or her income to increase, he or she may decide to increase purchases now. For example, he may decide to buy a new car on credit, or decide to renovate his apartment or house. However, if he expects a drop in salary, he may decide to make smaller purchases now.

CCI also includes questions about future purchasing decisions

The next part of the survey complements the previous 5 questions. According to data shown by The Conference Board, the next set of questions is a little more detailed. Responses are aggregated into the percentage of people answering yes.

Car

The first question is about buying a car. Then, people who want to buy a car are asked to provide information whether it will be a new, used or used car "I don't know".

Those investing in car manufacturers should especially look at this column. For them, it is best when the respondent wants to buy a new car. A large percentage of such respondents may mean that in future quarters the sales and financial results of such companies will be better than recently.

The beneficiaries of used car purchases may be owners of used car dealerships or platforms enabling the purchase of used cars. There are several companies in the US that sell used cars. These include: carmax or Carvana. Spare parts suppliers may also indirectly increase demand for used cars, as used cars need to be refurbished from time to time.

Property

The next question is about buying a house. It is important to remember that the real estate sector is always one of the key markets in any developed economy. The percentage of respondents answering affirmatively is also provided here. Here, too, you are asked to specify whether the purchase will concern a house or apartment from the secondary market or a new one.

If a large percentage of respondents say they want to buy a new house, developers of apartments and houses may be the beneficiary of this situation. These include: Toll Brothers, NVR or Dr. Horton. Other beneficiaries may also be suppliers of wood (some houses in the Tax Office are built from wood) or construction materials. For this reason, investors in American real estate companies should follow this part of the CCI index.

When a larger percentage of respondents decide to purchase real estate on the secondary market, it is normal to see an increase in traffic on websites aggregating house and apartment sales offers. This, in turn, means an increase in revenues and profits for this type of companies. An example of this type of companies is, for example, British right move or American Zillow.

Electronics and household appliances

The next question concerns the purchase of household appliances and electronics. Interestingly, the survey distinguishes the purchase of e.g. a TV, a vacuum cleaner or an air conditioner. Therefore, this may be interesting information for people investing in companies operating on these markets in the United States. The higher the percentage of people willing to purchase such equipment, the greater the chance for good quarterly results for both equipment manufacturers, distributors and stores selling this type of devices.

Holidays and others

Interestingly, the CCI also includes a question about holiday plans and, if the answer is yes, a request for information whether it will be a foreign trip and by what means of transport (car, plane). The more affirmative answers, the greater the chance that the demand for travel agencies' offers will increase. This, in turn, will result in more revenue generated by these types of companies.

How it is calculated Consumer Confidence Index?

At the end of the report, there is a Consumer Confidence Index broken down into individual income and age groups. Thanks to this, you can learn how particular social classes in the USA view the current and future economic situation.

Importantly, the CCI index is calculated in relative values ​​because is compared to 1985. The value of 100 is set for the mentioned year, so if the CCI in the current year is 99, it means that consumers have a worse mood than in the base year. It's worth it though compare the indicator year to year, quarter to quarter and month to month. This will allow you to detect what trends are currently prevailing among consumers. It is best for the economy for the CCI to increase. Then we can expect at least a good economic situation in the near future. In turn, a decline in the index value may mean that the economic situation is continuing to cool down. However, it is worth being especially vigilant when the index trend changes. This may mean that we are witnessing a change in the trend for the near future.

Is this really a leading indicator?

It is difficult to answer this question unequivocally. Those who believe that the CCI is ahead of changes in the economy suggest that it is consumers who often show the first signs of shortness of breath (e.g. a decline in purchases of cars or houses). This is what, among others, Organization for Economic Co-operation and Development (OECD), which listed CCI as a so-called “leading indicator”.  In turn, opponents of such a claim claim that it is rather an indicator that shows the deterioration of moods after the fact.

What is The Conference Board (TCB)

Finally, it is worth outlining what the mentioned organization is that is responsible for creating the title index. According to the information on the TCB website, its origins date back to 1916. It is an independent, non-profit association that brings together over 1000 companies and organizations from over 60 countries.

The beginning of the operation of the mentioned organization is very interesting. It was established in 1916 as National Industrial Conference Board (NICB). The date of its establishment is not accidental, because in previous years there was a strong dispute between employees and employers. Employees increasingly complained about terrible health and safety conditions, an example of which was the so-called Triangle Shirtwaist Factory fire from 1911. Social riots on economic grounds sometimes led to tragedies, including: Ludlow massacre of 1914. In 1915, the presidents of twelve large American corporations and six large industry associations decided to establish the NICB in order to protect their interests and improve the image of entrepreneurs in the eyes of society. It is worth remembering, however, that not all members of the association were confrontational towards trade unions. Among the promoters of acceptance and cooperation with unions were the co-founders of NICB, i.e. Frederick Fish (president of AT&T) and Magnus W. Alexander (by General Electric).

This association helped the United States in World War I. It was NICB and trade unions that developed a formula of cooperation that was supposed to reduce the number of factory downtimes to a minimum. Thanks to this, the US economy could support the Allied effort in the fight against the Central Powers.

Currently, the organization is best known for providing indicators that track consumer sentiment and management expectations. The Conference Board is after the U.S. Bureau of Labor Statistic one of the most important sources regarding the situation on the labor market. In the 70s, the organization began to expand to other countries. Currently, it has offices, among others: in Brussels, Hong Kong, Singapore, Beijing and Mumbai.

Summation

CCI is a very interesting indicator which, according to the OECD, allows predicting the economic situation in the coming months. The above-mentioned index is not only the final result, but also a lot of information regarding individual consumer purchase decisions (e.g. purchase of real estate, car or household appliances). Therefore, it can be a valuable source of information for individual industries and their investors. It is therefore worth carefully examining the indications of individual variables calculated for the purposes of CCI.

The CCI itself consists of 5 questions regarding both the current and future economic situation. In addition, it contains information on purchasing decisions, which is also an interesting source of data on the expected demand for specific durable or consumer assets.

Key conclusions:

• The Consumer Confidence Index is created on the basis of surveys that investigate consumer behavior and expectations regarding their financial future;
• CCI is based on the Consumer Confidence Survey and is then analyzed by the Conference Board;
• The indicator helps determine the future condition of the American economy because it also affects purchases of durable goods such as houses and cars;
• In the survey, consumers answer how they assess the state of the economy, business conditions, the labor market and what their forecasts are for the next 6 months;
• The indicator bases its usefulness on the assumption that consumers are more willing to spend when they are in a good mood and expect that nothing bad will happen in their lives.