Consumer Confidence-Consumer Sentiment: What’s the Difference?

Many of us listen to the economic news regularly in an effort to understand what is happening in the economic world. Each month we get a report from the Conference Board about their recent reading of their Consumer Confidence Index. Within a week we get a report from the University of Michigan-Thomson Reuters Consumer Sentiment Index. Many times in the past three years these indices have been in conflict with each other. Which one do we believe? Why can’t the statistical measurements of consumer confidence and consumer sentiment give the same results? Don’t confidence and sentiment mean the same thing?

In answer to the last question: No, consumer confidence and consumer sentiment are not the same thing as measured in each index. But each index tells us something and it is important to know what each index measures.

The Conference Board was established in 1916 to objective independent sources of economic information for business leaders. (www.conference-board.org).

The Consumer Confidence index is 5 questions asked of 5,000 households each month. The questions are:

1. Current business conditions
2. Business conditions for the next 6 months
3. Current employment conditions
4. Employment conditions for the next 6 months
5. Total family income for the next 6 months.

The answers can be “positive”, “negative” or “neutral”. The benchmark of 100 is set at 1985, a year that was neither a peak nor trough in the economic cycle.

All five questions are used to calculate the Index of Consumer Confidence. Questions 1 and 3 are used to generate a “Present Situation” index; while questions 2, 3 and 4 are used to create an “Expectations” index. You can see that the model is more heavily weighted to the future (60/40).

The University of Michigan Consumer Sentiment index (www.thomsonreuters.com/products_services/financial/financial_products/a-z/umichigan_surveys_of_consumers) was developed by a professor at U of M in the 1940s and was first published in 1946. This survey is conducted with a telephonic interview of 500 households asking them 5 questions:

1. Personal financial situation now and 1 year ago.
2. Personal financial situation 1 year from now
3. Overall financial condition of the business for the next 12 months
4. Overall financial condition of the business for eh next 5 years
5. Current attitude towards buying major household items.

The answers to all five questions are statistically adjusted to produce the Michigan Consumer Sentiment Index (MCSI). The answers to questions 1 and 5 are used to develop the Index of Current Economic Conditions (ICC). Answers to questions 2, 3 and 4 are used to calculate the Index of Consumer Exceptions (ICE). This last index (ICE) is a component of the US Index of Leading Economic Indicators.

So, which index is the best? It depends on what you are looking for. In general, you can say the Consumer Confidence index is weighted more heavily toward the future and has a bigger sample population. The Michigan Consumer Sentiment index has a shorter time horizon and has a smaller sample. As you read about these indices, understand what they measure and decide what it tells you about the time frame that is most important to you.

Tagged as: business projections, Economic sentiment, employment, Forecasting