How Consumer Confidence Impacts the Economy
As a percentage of the GDP of most developed economies comes from consumer spending, confidence among consumers is one of the most important economic indicators. When consumers are confident in the economy, they are generally more likely to spend and save money. When they are not confident in the economy, they save their money instead of spending it. Since consumer spending has such a strong impact on the growth of the economy, people pay attention to the consumer confidence survey. While consumer confidence does not dictate the economy, it helps people gauge the spending that will take place in the future. What Is Consumer Confidence?
Consumer confidence is a survey that measures the level of optimism or pessimism that consumers have for the current and future economy.
The questions asked of the consumers can include:
The financial situation of the consumer
The consumer’s outlook for their employment situation
Their overall business outlook
Their outlook for their income
Their intention to make major purchases
Their economic outlook
The answers to these questions will yield a confidence index for the consumers of the country.
Economic confidence changes before economic data does.
Why Consumer Confidence Matters
The spending that is performed by consumers impacts the industries in which they spend their money.
With high levels of consumer confidence, consumers will likely choose to purchase items and services from industries such as:
Real estate
Automobiles
Travel
Electronics
Dining out
Home improvements
With these types of purchases, the economies of these industries will grow as a result of the spending from confident consumers.
With low levels of consumer confidence, those same industries will likely experience a drop in their economies.
Confidence and Retail Spending
Retail stands the most of the consumer confidence.
Some of these industries include:
Clothing
Consumer electronics
Furniture
Luxury goods
Restaurants
Entertainment
With positive consumer confidence, these industries will generally experience an increase in sales as consumers are more likely to purchase from them.
With a lack of confidence in the economy, consumers will focus on purchasing only essential items.
Retail and confidence are two indicators that are closely watched by the economy.
Employment Influences Consumer Behavior
Many factors can influence the level of confidence that consumers have in the economy.
Some of the factors include:
The level of unemployment in the country
Wages
Job security
Career opportunities
If consumers feel that they have good employment and that their jobs are secure, they are more likely to purchase items such as homes and cars.
If unemployment increases, the level of confidence in the consumer economy will take a dip.
Inflation Can Change Spending Habits
Another key economic factor that impacts the confidence that consumers have in the economy is inflation.
High inflation will influence consumers to reduce their spending and save their money.
Lower inflation will help consumers to feel better about their budgets and their ability to confidently purchase goods and services.
Business Investment and Consumer Demand
Many businesses use the level of confidence that consumers have in the economy to influence their business investments.
With high confidence from consumers, businesses will invest in their companies to support the growth that consumers will generate.
With low levels of confidence from consumers, businesses will delay their business investments.
Financial Markets Follow Consumer Trends
Another aspect of the economy that is influenced by the confidence that consumers have in the economy is the financial markets.
With high levels of consumer confidence, the stocks of retail and other industries will experience an increase in their values.
With a drop in the confidence that consumers have of the economy, the financial markets will shift their attention to different industries.
While many factors influence the financial markets, the confidence that consumers have is one of the more important factors for determining the future of the markets for the consumer industries.
Consumer Confidence Is a Leading Indicator
Consumer confidence differs from the GDP of a country because it is a leading indicator.
This means that it can provide insight into the future of the economy in terms of:
Consumer spending
Business investment
Employment
Economic growth
Corporate revenues
Since the consumers have an expectation of the economy, it is one of the best indicators for the economists of the changes that will occur in the economy.
However, consumer confidence as a survey has some limitations. Some of the limitations of this survey include using human emotions as a measure of the economy, using regional measures of the country for answers to survey questions, and the effect that the news has on those survey answers on a short-term basis.
While consumer confidence is an important economic indicator, professional investors also use employment, inflation, retail sales, and the GDP of the consumer goods industries to provide a better understanding of the country’s economic health.
Key Takeaways
Consumer confidence is a survey that determines the level of optimism that consumers have of the country’s economy.
High levels of confidence will enable consumers to spend more money.
Two of the main factors that influence the level of consumer confidence are the unemployment rate and inflation.
Businesses will change their business investment plans according to the confidence that consumers express in the economy.
Financial markets will change according to the level of confidence that the consumers have in the economy.
Consumer confidence is a leading indicator of the economy.
Conclusion
Because the spending of consumers is one of the main determinants of the economic growth of a nation, it is important to monitor the level of confidence that they have in the economy. By doing so, individuals can better understand the factors that will impact the economy and the financial markets in the future.