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Consumer confidence (CC) is seen as an important indicator of the economic health of a nation and the latest figures of the state of consumer confidence are awaited with eagerness or anxiety each month. Consumer demand is a very important element in every economy and the amount which the consumers are prepared to spend rather than save is affected by their confidence in the future of the economy and how it will affect the household income. High consumer spending gives a boost to retail and other industrial sectors and increases company turnover and profits. When the index of consumer confidence shows confidence is high, companies may prepare for a healthy period of trading, which means manufacturers will increase output and retailers will increase their stock levels to cope with the expected increase in consumer demand.
On the other hand, where consumer confidence is low the consumer is likely to spend less, especially on relatively expensive consumer durables such as cars and major household appliances. A larger proportion of income is more likely to be devoted to reducing the large levels of individual debt that may have been built up during periods of greater consumer confidence. There will be less money spent at retailers and as such, they will need to reduce stock levels. This means manufacturers will be looking to reduce output to avoid being left with large numbers of finished goods lying idly in their warehouses.
The reality of the situation is, however, a little more complex than this. Consumer confidence is often referred to as a lagging indicator. It does not react quickly to changes in the economic climate and may remain low for some time after an upturn has begun. This is understandable, as some other closely linked indicators such as employment are also lagging indicators and these, in turn, affect consumer confidence. Consumers do not necessarily have a perfect understanding of the economic situation in all its detail and when the economic climate improves consumers are liable to initially be skeptical, not seeing any immediate improvement in their employment prospects or salary levels. Most consumers will not change their spending behavior overnight, but may gradually reassess their financial position and eventually conclude they can open the purse a little wider again.
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How It's Measured
The level of consumer confidence is an important economic indicator and is a vital piece of information for retailers, manufacturers, investors and governments. The measurement of consumer confidence is, therefore, a very serious matter and the criteria used in the measurement and the methodology employed must be as accurate and useful as possible. The measure of consumer confidence takes into account the view of the current economic situation and the prospects for the near future. CC surveys need to measure the views of consumers on the economy, current employment and income and direction in which these factors are heading in the upcoming months.
In the U.S., the Consumer Confidence Index (CCI) is compiled on the basis of a survey of the perception of the economic situation in the eyes of consumers. A random sample of consumers is questioned about their view of the current economic and labor market conditions and their view of the prospects for these factors in relation to their income for the next six months. The selection of sample of consumers is carefully planned to be representative and needs to be consistent from one month to another to maintain comparability, although some modifications to the procedure for carrying out the survey are introduced from time to time.
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Using the CCI
The Consumer Confidence Index is examined closely by businesses, investors and governments. It is important for these groups to know how consumer confidence is measured. As mentioned above, retailers and manufacturers respond to changes in the index by adjusting stocks and production levels to adjust to the expected level of consumer demand. Investors also take an interest in the consumer confidence levels which like other important economic indicators, may affect the equity markets and point to future trends in the economy.
The level of consumer confidence is also noted by governments, which are taken into account in assessing the state of the economy and planning future economic policy. For example, the level of consumer confidence will be an important factor when governments and central banks make decisions on interest rates. Depending on the government approach to economic policy, they may consider lowering interest rates to boost consumer demand. Lower interest rates might encourage consumers to take on higher levels of debt in order to make important purchases, thereby increasing consumption and boosting general economic activity, so one can see it's essential to learn how is consumer confidence measured in order to understand current economic factors.