JF_Consumer Confidence Index Final

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Running Header: JEFF FORSTNER CONSUMER CONFIDENCE

Consumer Confidence Index

Productivity Paper

Jeff Forstner

Indiana Wesleyan University

MBA 651, ADM 524

Mr. Jay Taylor

May 3rd, 2011



JEFF FORSTNER CONSUMER CONFIDENCE 2

This paper will discuss the definitions, trends, conflicts with other indicators, and effects of the

C.C.I. (Consumer Confidence Index). The C.C.I. is an economic indicator that is used to measure

consumer confidence in the United States. This index has been calculated by The Consumer

Confidence Board since 1967. The Nielson Company collects monthly input from 5000

households on five key areas: 1) current business conditions, 2) business conditions for the next

six months, 3) current employment conditions, 4) employment conditions for the next six months

and 5) total family income for the next six months. Each questions’ positive responses are

divided by the sum of its positive and negative responses. The current responses are compared to

the baseline comparison data in 1985 to form a relative value from 0 to 100 for each one of the

five areas. This leading indicator measures how confident consumers are about their job stability

and the state of the economy. It is considered a leading indicator because the readings have

proven to change ahead of economic changes. Table 1 (p. 7) shows how the real consumer

expenditure index follows the Consumer Confidence Index readings. Many economists feel that

this consumer confidence can cure most of what ails most economies.

There are two other leading indicators that measure consumer confidence. The University of

Michigan Consumer Sentiment Index is a similar measure with added focus on current attitude

toward buying major household items. The Washington-ABC News Consumer Comfort Index is

a simplified rolling average of 1,000 monthly telephone surveys providing ratings of; excellent,

good, not so good, or poor regarding national economy, personal finances, and buying climate.

There is also a Consumer Confidence Average Index that aggregates data from these three

indexes above.




Table 2 (p. 7) shows the Consumer Confidence Index ratings for the last 5 recessions. The

recession of 2001 had confidence as high as 101 to the lowest ranking of our last recession 2007-

2009 of 53.8. Table 3 (p.8) shows the Consumer Confidence Index for the last 35 years. The

current reading of 65.4, although a 3 month high and above the trough reading in 2008, is

significantly below the current regression level of 84.6. Index of 90 and above are considered to

be optimal and signal a healthy economy. In the April 26 th monthly update edition of dshort.com,

Doug Short compares the consumer confidence patterns of the past 18 months to that of the

pattern following the 1990-1991 recession, and also the period after the 2001 recession. He

found that all three periods lag due to a similar factor: slow jobless recovery. Another interesting

observation is that the regression trend for Consumer Confidence closely resembles the

regression for the GDP (Gross Domestic Product) history. When the G.D.P. dips, that usually

triggers layoffs, which trigger negative perceptions of job market, which in turn lowers the

Consumer Confidence Index. Mark Vitner, economist with Wells Fargo, remains cautiously

optimistic. “While the Index was an improvement, it doesn’t signal strength in the economy”, he

said. “Confidence is not likely to go up meaningfully until gas prices and unemployment come

substantially down” (The Fiscal Times).

Jennifer DePaul, an Editorial Producer for The Fiscal Times, further breaks down the current

Consumer Confidence Index in the April 26th edition. Perceptions that the economic conditions

were good, decreased slightly to 14.8 from 15 in previous months. The perception regarding the

statement that jobs are hard to get decreased to 41.8 from a previous 44.4 rating. Those that felt

that jobs were plentiful increased to 5.2% from 4.6% previously. Confidence that business levels

will improve decreased slightly to 18.8 % from 20.8%. Those expecting the labor market to grow




decreased to 17.5% from 19.6 % in a previous survey. Lastly, expectations of increased income

rose to 16.7% from 15%.

In Table 4 (p.9) February 2003 and February 2009 were the two time periods where there were

drastic variations between the C.C.I. and the Consumer Sentiment Index. One theory for the

variations could be that the C.C.I. was dragged down faster and lower due to the question about

the employment conditions, as those two time periods did show higher unemployment. Another

variation could be caused by C.C.I. survey’s question regarding total family income for the next

six months, which could also be significantly effected by layoffs. Bram and Ludvigson (1997), in

their paper comparing forecasting abilities of C.C.I. and University of Michigan’s Consumer

Confidence Index, found that the C.C.I. is a more reliable indicator. C.C.I. has a larger sample

size and therefore is not subject to as many errors. C.C.I. also captures a broader data range and

is therefore better for predicting a wider range of expenditures than The Consumer Sentiment

Index. Bram and Ludvigson did state that there is merit in utilizing both models in predicting

growth (p.20).

One other interesting forecasting tool that is coming into vogue is the use of Google Trends.

Schmidt and Vosen’s Forecasting (2007) paper discusses the potential benefits for business’ to

use Google trends to more accurately predict private consumption (November, p. 16). To use

Google data for forecasting private consumption, a time series of unobserved web inquiries are

recorded and charted. The technology is still too new to be a standard economic predictor.

Next, a discussion on how the C.C.I. affects the tire industry. Variation in the CCI levels will

cause manufactures and other providers of services to either ramp up or cut back. This will

contribute to the rising and falling of stock prices as well. In the case of extreme variations, the

Government will step in and issue a tax rebate or other fiscal action to stimulate consumer




confidence, which would encourage manufacturers to increase production. Table 5 (p. 10) shows

the direct correlation between Light Auto Sales and consumer confidence. When consumer

confidence is low and car sales are low, the replacement tire market should be growing due to the

repair of all the older vehicles that will continue to remain on the road. This would be the time

for tire wholesalers, like Dealer Tire, to stock up in order to be able to ship those replacement

tires to the dealers.

In the May 10th edition of Tire Business, Roy Armes, Chairman and CEO of Cooper Tire &

Rubber Company states that “consumer confidence eventually will improve, leading to improved

tire demand. However, gains will be modest, rather than a major upswing. There are low levels

of inventory across the entire supply chain at the moment, which offers an opportunity for

manufacturers to ship more tires.” It should also be noted that this pent up demand also opens the

door for tire manufacturer price increases. 2011 has already seen unprecedented price increases

in the neighborhood of 24%, levied by the industry as a whole during the last six months. In the

April 11

th

edition of Service Executive, they state that the main factor increasing vehicle

operating expense is the 15.7% increase in the price of tires. Even when customers face that

fateful day when their tread is completely gone, their confidence level in the economy will have

a direct effect on how many tires they replace and which price point they can afford.

In conclusion, The Conference Board’s Consumer Confidence indicator, even with its wider

movement of the index, biases, margin of error, and old technology, C.C.I. has stood the test of

time as the official and most recognized measurement of consumer confidence.




References

Bram, Jason and Ludvigson, Sydney, (1997). Does Consumer Confidence Forecast Household

Expenditure? Domestic Research Function, Federal Reserve Bank of New York; New

York, NY.

Depaul, Jennifer, Consumer Confidence, The Fiscal Times (April 26, 2011)

Moeller, Tom. April 26, 2011U.S. Consumer Confidence Recovers, Haver Analytics, NY, NY

http://www.haver.com/comment/comment.html?c=110426c.html

Schmidt, Torsten and VosenRuhr Simeon, Forecasting Private Consumption:

Survey-based Indicators vs. Google Trends -Universität Bochum (RUB), Department of

Economics Universitäts str. 150, 44801 Bochum, Germany. November, 2009. ISSN

1864-4872 (online)

Schnorbus, Robert H., PhD. The National and Local Economic Outlook ,

The Federal Reserve Bank of Richmond. July 22, 2010. OCLS reference

Short, Doug. Conference Board Consumer Confidence Index, (February 10, 2010)

www.dshort.com

Fill rates are improving, Armes tells NETSA. Tire Business. May 10th 2011 by Crain

Communications Inc.

http://www.thefiscaltimes.com/Authors/D/Jennifer-DePaul.aspx

http://www.dshort.com/


http://www.thefiscaltimes.com/Authors/D/Jennifer-DePaul.aspx




Table 1 Consumer Confidence Recovers

http://www.haver.com/comment/comment.html?c=110426c.htmlTable 2

Consumer Confidence Index during past recessions

www.dshort.com






Table 3

Vertical is Confidence Index rating and Horizontal is Year time line




Table 4

www.rjomrt.com




Table 5

JF_Consumer Confidence Index Final

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