It can be confusing when two similar-sounding metrics are different things—Confidence and Sentiment. Headlines in March reported a lower Consumer Confidence while others reported a higher Consumer Sentiment. How is this possible? Which is right and why does Consumer Confidence even matter?
Confidence indicators offer valuable insights into the economy, providing a firsthand perspective on its current state and serving as predictors of future spending patterns. Moreover, they shed light on consumers' inflation expectations. Although there is a delay between the release of these reports and their impact, they are regarded as leading indicators that aid in forecasting the economy's trajectory in the near to intermediate term. This is why business executives and investors closely monitor these indicators, seeking clues about the economy's future direction.
Which survey is accurate? Both. Claims from both the Consumer Confidence Survey and the Consumer Sentiment Survey hold validity; it simply hinges on the questions asked and timing.
Critical metrics that investors closely watch each month originate from these two surveys designed to grasp and monitor the behaviors and attitudes of American consumers. Given that consumer spending constitutes about two-thirds of the American economy, it's understandable why investor unease is closely tied to them.
Key Takeaways
The Consumer Confidence Index and the Michigan Consumer Sentiment Index are two sources of information on the current degree of optimism among American consumers. University of Michigan. "Surveys of Consumers."
Both are published monthly.
Together, they suggest whether the mood of consumers and their attitude towards spending is getting better or worse over time.
"Consumer Confidence" and "Consumer Sentiment" are actually short-hand for two monthly surveys from different sources. Each aims at judging the degree of confidence that Americans feel about their current financial status and their expectations of change for the better or worse in the near future. In other words, do consumers feel free to spend?
Consumer Confidence Index
The Consumer Confidence Index (CCI) is published by the Conference Board, a not-for-profit research organization for businesses. The survey is a sample of 3,000 households from across all nine census regions.
The survey usually covers five major sections:
Current business conditions
Business conditions for the next six months
Current employment conditions
Employment conditions for the next six months
Total family income for the next six months.
The Consumer Confidence Index is released on the last Tuesday of every month.
Consumer Sentiment
The Michigan Consumer Sentiment Index (MCSI) is a national survey of 500 households conducted by the University of Michigan.
The purpose of the survey is to collect information about consumer expectations regarding the overall economy.
The MCSI covers seven sections:
Current Economic Index
Personal Finances Current
Buying Conditions Durables
Expected Economic Index
Personal Finances Expected
Business Conditions 1 Year
Business Conditions 5 Years
MCSI releases a preliminary report mid-month and a final report at the end of the month.
Key Differences
Investors look at the results of both of these surveys the same way: If the number is up compared to last month, consumers should be willing to spend more money. If the number is down over last month, they're tightening their belts.
However, their results can and do diverge in the short term due to a number of factors:
Both surveys are conducted monthly but not simultaneously. A sudden rise in gasoline prices or a drop in the stock market can affect the numbers.
The Conference Board survey queries a larger sample, while the Michigan survey has more detailed questions.
A Disconnect?
In theory, there shouldn’t be one. Both are survey-based, and while the confidence survey is larger, the Michigan sentiment survey has more detailed questions. The surveys are done at different times of the month, which may result in occasional differences when things are changing quickly, but over time shouldn’t make much of a difference. Indeed, most of the time the two are quite close, although the confidence measure tends to be significantly more variable. In practice, though, there are a couple of reported tendencies. The confidence number tends to be more oriented toward the job market from a worker’s perspective, while the Michigan number tends to focus more on things that affect business conditions, especially for the smaller business owner. Taken at face value, that could well explain a disconnect. Confidence for workers remains high as hiring is strong and there are lots of jobs available. On the other side, sentiment for business owners is hurting because they can’t hire people and their costs are going up with inflation. One group still feels pretty good, and the other not so much. That would explain a discrepancy.
It is also consistent with history. When the gap has been large before, with confidence higher than sentiment, it has been when the job market was quite strong, as in the late 1980s, 1990s and mid-2000s, as well as from 2015–2019. The other gap was in the late 1970s when inflation was high. When the labor market is weak, as in the aftermath of recessions, we should expect the Michigan number to be higher.
In the most simplistic terms, when their confidence is trending up, consumers spend money, indicating the sustainability of a healthy economy. When confidence is trending down, consumers are saving more than they are spending, indicating the economy is in trouble or in the process of contracting further. Essentially, the more confident people feel about the stability of their incomes, the more likely they are to maintain, or increase, their spending patterns.
