The Consumer Confidence Index (CCI)

The consumer confidence index is a barometer for the economy based on a survey of citizens. Five thousand consumers are polled each month to come to a statistic generally oscillating between 50 and 150. Most of the index is based on consumer spending and the amount of buying power as well as disposable income one has. As the theory goes, feelings of future wealth and income also bolster the economy. As people feel more able to purchase with the thought of future income, more people will purchase larger ticket items. Imagine someone who has landed a career job with hardly any savings or past paycheck stubs yet who knows her annual income will be dramatically higher. Chances are that person will be more inclined to buy a car or larger ticket items at the mall when shopping. Consumer confidence, in a way, gauges those sentiments.

Investors will look to the consumer confidence index to see the fundamental picture of the economy. This report comes out at least once a month, and the higher the index is, the greater the fundamental picture for the aggregate economy is. This is due to the fact that two thirds of the U.S. economy is allegedly associated with consumer spending. This makes consumer confidence a key lagging indicator to the bigger picture in the markets.

Lagging Indicator

A lagging indicator is one that confirms a current trend or statistic. A leading indicator, by contrast, would be one that foretells a future trend or revelation. Weekly store sales and the reports on them in the "Johnson Redbook," for instance, would be leading indicators for how well consumer spending is holding up, while the consumer confidence index is a lagging indicator either confirming or countering the current trend.

How It Is Used with Investors

Given that it is somewhat of a lagging indicator, news traders will not be eager to trade based on the release of a current confidence index level. It is also important to note that the index has its cycles when taken into perspective and averaged out. Just like growth data for the economy, consumer confidence can be very chaotic and uneven in its signals to investors.

Investors will mostly look to the consumer confidence index as a contrarian indicator. In other words, if consumer confidence is excessively strong, investors will poise themselves for a dip in the market. The opposite is true for when consumer confidence is exhibiting weakness. Along with other indicators, this can be a good setup for a contrarian investment thesis during times of predictability in the middle of a growth cycle. Investors will also look to the index to show a major rebound during times of a recession.

The latest long-term trend has been one of volatile decline for consumer confidence. This has been due to the great recession of 2008 and basically a credit crisis that has been ongoing because of the long duration of recessions attributed to fundamental credit problems.

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