Getting people to purchase a good or service is the primary goal of any functioning company in the world. Corporations spend millions of dollars to understand what makes people tick, on research analysis, focus groups, in-depth marketing, and surveys, and what might influence them to purchase products. The level of confidence that households on a wide scale have in the economy and vis-a-vis their personal finances is extremely vital to any organization. Consumer sentiment helps companies better understand how much of a good to produce, as well as where best to sell. Whether it is an apparel company like Nike attempting to figure out how many shoes to produce this year while projecting its American sales figures, or a technology company such as Apple setting its targets for a new iPhone, companies highly desire the latest consumer attitudes on the economy.

For decades, consumer confidence has been tracked by the The Conference Board by Nielsen, a global provider of information and analytics on the buying and watching habits of people around the world. The consumer confidence index helps measure the health of the U.S. economy and is “based on consumers’ perceptions of current business and employment condition, and their expectations for business, employment, and income for the next six months.” The company surveys thousands of households every month, with five questions total — two related to present economic conditions and three regarding expectations. Each question can be answered positively, negatively, or neutrally. Since 1985, the index has been set to 100. Today, the index is at 95.3 for the month of August 2018, the lowest in a year.

To explain the low confidence, “consumers voiced the least favorable views on pricing for household durables in nearly ten years, since October 2008. Vehicle buying conditions were viewed less favorably in August than anytime in the last four years, with vehicle prices being judged less favorably than anytime since the close of 1984. Home buying conditions were viewed less favorably in early August than anytime in the past ten years, with home prices judged less favorably than anytime since 2006.” In other words, some of the most important things that people purchase, that they spend the largest amount of money on and use nearly every day for a long period of time – cars and homes – have highly unfavorable prices and supply. With cars, the decline in consumer favorability could be explained by a sudden shift in preference from sedans (long a staple of the American economy and road) to more costly, larger cars like SUVs and crossovers, without the adequate supply to satisfy rising demand; additionally, this year marks the highest average cost of a used car in 13 years.

All types of organizations – including investment firms, manufacturers, retailers, global financial management firms, as well as governments – see the sentiments of consumers as key to planning strategy and actions for the foreseeable future. According to Yahoo, because weak consumer confidence may indicate declining consumer spending, manufacturers will likely decrease their inventories in advance. Asset management firms or institutional investors might not invest in new projects and companies involved in the large-scale selling of goods, such as retailers like Walmart. Construction of homes will decline due to lower demand. Governments would need to ready for future tax revenues reduction and quickly figure out where its spending cuts will likely have the least significant impact.

The consumer confidence index is considered to be a leading economic indicator for the United States economy. Additionally, the Organization for Economic Cooperation and Development (OECD) considers consumer confidence a global leading economic indicator. Thus, by analyzing consumer confidence, investors, companies and governments alike will get a better sense of what they should do to reflect the latest attitudes about the economy.

Sources:

https://www.wsj.com/articles/america-has-fallen-out-of-love-with-the-sedan-1535169698

https://www.usatoday.com/story/money/cars/2018/06/15/used-cars-price-hit-record-high/700362002/

https://tradingeconomics.com/united-states/consumer-confidence

https://finance.yahoo.com/news/why-consumer-confidence-important-economic-170019558.html