What Do Consumer Sentiment Numbers Tell Us?Johnathan Douglas
The country’s economic outlook suffered a bit of a blow in October. The Index of Consumer Sentiment had been projected at 88.2—already a bit of a decline from 91.2 in September. The actual figure, though, was lower still, coming it at 87.2. What is consumer sentiment, and what does it mean for you?
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Are You in the Mood to Buy?
There are a variety of ways of measuring the health of an economy, which take into account a number of different factors. Consumer sentiment considers people’s feelings about their own financial stability and that of the country as a whole, as well as their expectations for future economic growth or improvement.
The Index of Consumer Sentiment, put out monthly by the University of Michigan, is a measurement of the mind-set of the buying public. Conducting polls of 500 or more people throughout the lower forty-eight states, using a series of fifty key questions, they’re able to quantify our general financial outlook, both presently and for the future.
What This Means for You
The October survey of the Consumer Sentiment Index indicated around half the country is expecting some sort of economic downturn over the next five years. Evidence from a number of financial experts supports this, and many believe we’re headed for another large financial crisis like the one in 2008, somewhere in the next 12 months.
To be clear, the Consumer Sentiment Index doesn’t measure the actual likelihood of economic downturn. It shows what people think of the economy based on their personal experiences. If half of those surveyed believe that we’re headed for a slump, it’s certainly a good indicator that something’s wrong. It’s not, however, necessarily an accurate indicator of future financial performance.
However, there’s one very concrete issue to consider: Since the Index is one measure of the health of our nation’s economy, it’s also one of the factors the Fed uses when determining whether or not to raise interest rates.
They raised the rate slightly last December, with the expectation they might do so again up to four times this year. So far, they haven’t chosen to enact another increase. However, the Board has one more 2016 meeting, this month. Many have speculated that at that time, the rate could go up again, based on a number of factors indicating increased economic health for our country. The decrease in the Consumer Sentiment Index, could help to sway them the other way, though.
Raising the federal interest rate isn’t something that’s done lightly. It has significant consequences for our economy, which result in higher prices and lower disposable incomes. Therefore, the rate is only raised if the Fed believes the economy is strong enough to handle it.
Increasingly this year, they’ve indicated that they believe it is. However, it’s clear that the average American thinks otherwise—and we’re the ones who will be impacted by a rate hike. The Fed may take the Consumer Sentiment Index into consideration as they make their decision, along with a number of other factors that indicate a weakening economy.