Sunshine After the Rain: Consumer Confidence and the Economy

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The U.S. Consumer Confidence Index has stabilized after experiencing a sharp decline caused by COVID-19. This suggests consumers are beginning to improve their sentiments towards the economy and its resiliency. 

The Consumer Confidence Index (CCI) tracks consumer optimism based on saving and spending behaviours. The index is composed of opinions on current economic conditions (Present Situations Index) and futures expectations (Future Expectations Index)

Consumer spending is a powerful driver of economic spending in industrialized economies, accounting for 70% of the U.S.’s GDP. 

Manufacturers, retailers, banks, investors and government agencies often rely on consumer indicators to guide their actions. 

When waning confidence is perceived, manufactures may decrease their inventories in anticipation of decreased consumer spending and may delay executing on new projects. 

This can lead to a cascade of events, such as decreased occupations in reflection to decreased demand which can result in a positive feedback loop if consumer sentiments do not change. Moving the economy further away from equilibrium.

What’s the news with the CCI Index? 

“Following two months of rapid decline, the free-fall in Confidence stopped in May,” says Lynn Franco, Senior Director of Economic Indicators at The Conference Board.

The Consumer Confidence Index has been relatively stable for May, increasing from 85.7 in April to 86.6. Suggesting Americans are optimistic in the recovery of the economy following the COVID-19 pandemic. 

The effects of COVID-19 have mainly been reflected in the Present Situation Index, which suffered a 100 point hit since the beginning of the pandemic. 

Recent data suggests a moderate increase in short term sentiments which may be a reflection of the economy gradually re-opening. Although, consumers still remain weary of their financial prospects. Consumers are especially concerned with inflation. Which would lead to a decrease in purchasing power resulting in lower spending and a snowball of effects on the economy with the possibility of a boom and bust scenario.

Present Situation Index:

  • Consumers’ current business and labour market condition sentiment declined from 73.0 in April to 71.1
  • Consumer opinions on:
      • Current conditions for business are “good” decreased from 19.3 to 16.3
      • Current conditions for business are “bad” increased from 45.3 to 52.1
      • Jobs are plentiful decreased from 18.8 to 17.4
      • Jobs are hard to get decreased from 34.5 to 27.8

Expectations Index:

  • Consumers’ expectations for income, business and market condition in the near term rose from 94.3 in April to 96.9
  • Consumers opinions on:
      • Business conditions improving over the next 6 months increased from 39.8 to 43.3
      • Business condition worsening over the next 6 months decreased from 25.1 to 21.4
      • Greater jobs in the coming months decreased from 41.2 to 39.3
      • Fewer jobs in the coming months decreased from 21.2 to 20.2
      • Increase in short-term income prospects decreased from 17.2 to 14.0
      • Decline in short-term income prospects decreased from 18.4 to 15.0

 

Considering the improvement in consumer sentiments, the recent rallies observed in the Nasdaq Composite, S&P 500 and Dow Jones Industrial Average are warranted. 

Potential threats to the future of the economy include:

 

Harmanveer Randhawa

Equity Research Analyst

Student of Financial Modelling and Applied Mathematics at the University of Western Ontario. Applying analytical skills in search of valuable opportunities. Cool headed, logical, not afraid to capitalize on risk and go against the crowd.

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