Consumer Indicators and How to Use Them in Trading
Written by Aaron Akwu, Head of Education Hantec Markets
What are Consumer Indicators?
Consumer indicators, also known as consumer economic indicators, are essential metrics used to gauge the overall health and confidence of a country’s economy from the perspective of its consumers. They provide valuable insights into the spending patterns, sentiments, and behaviour of consumers, which play a crucial role in shaping economic trends.
Some of the Key Indicators
In economics, key consumer indicators play a crucial role in gauging the health and sentiments of a nation’s economy. These indicators, expressed in numbers, shed light on various aspects of consumer behaviour, expectations, and spending habits. In this segment, we will look at the significance of essential consumer indicators and their relevance in assessing economic conditions.
What is the Consumer confidence index (CCI)?
The Consumer Confidence Index is a vital metric that measures the overall optimism and pessimism consumers have about the current and future economic situation. It is usually derived from consumer confidence surveys and is presented as a numerical value. A higher CCI signifies positive sentiments among consumers, indicating they are more likely to spend, while a lower value might suggest economic uncertainty.
The Consumer Confidence Index (CCI) is published on the final Tuesday of each month, making it a highly reputable measure of U.S. consumer confidence. It serves as a significant indicator of the overall well-being of the U.S. economy, relying on consumers’ evaluations of present business and employment circumstances, along with their anticipations for the business, employment, and income prospects in the forthcoming six months. The CCI survey is carried out by Nielsen, a renowned global provider of insights and analytics on consumers’ purchasing and viewing behaviours.
What is the Consumer price index (CPI)?
The Consumer Price Index (CPI) is a vital economic indicator used to measure inflation and changes in the average prices of goods and services that households purchase for consumption. It is one of the most widely followed indices by governments, businesses, economists, and policymakers alike to assess the cost of living and its impact on consumers’ purchasing power.
The CPI is typically calculated and published on a regular basis by government statistical agencies in various countries. The index is based on a basket of goods and services that represent the typical spending patterns of urban households. This basket includes a wide range of items, such as food, housing, transportation, healthcare, education, and recreation, among others.
The CPI measures the price changes of these items over time, comparing the current prices to a reference period, often called the base period. The base period is given a value of 100, and the subsequent periods are expressed relative to this base. For example, if the CPI for a specific year is 120, it means that prices, on average, have increased by 20% compared to the base period.
To calculate the CPI, data is collected from various sources, such as retail stores, service providers, and other businesses, to determine the current prices of the goods and services in the basket. The collected prices are then compared to the prices in the base period to compute the percentage change.
In June, the Consumer Price Index for All Urban Consumers increased 0.2 per cent, seasonally adjusted, and rose 3.0 per cent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.2 per cent in June (SA), up 4.8 per cent over the year (NSA).
The CPI serves multiple essential purposes:
- Inflation Measurement: It provides a quantitative measure of inflation, which is the general increase in prices across the economy. Governments and policymakers use this information to understand the current inflation rate and its impact on the purchasing power of consumers.
- Cost-of-Living Adjustments: The CPI is used to adjust various payments and benefits, such as Social Security payments and pensions, to keep them in line with the changing cost of living. This ensures that recipients’ purchasing power remains relatively stable over time.
- Economic Policy: Central banks and governments use CPI data to formulate monetary and fiscal policies. The information helps them make decisions on interest rates, taxes, and other measures to the economy and control inflation.
- Real Wage Calculations: The CPI is essential for assessing real wages, which are wages adjusted for inflation. Understanding real wages helps determine the actual purchasing power of workers’ income.
- Comparing Economic Indicators: Economists and analysts use the CPI to compare economic data across different periods, regions, or countries. It provides a standard reference point to evaluate price changes in various economies.
It’s important to note that the CPI has its limitations and critics. Some argue that the basket of goods used for the index might not accurately represent individual spending patterns, leading to a potential understatement or overstatement of the impact of inflation on specific demographics. Additionally, certain goods or services, like technology products, may experience substantial improvements over time, which may not be fully reflected in the CPI.
Despite these limitations, the Consumer Price Index remains a crucial tool for understanding inflation, making economic decisions, and protecting the purchasing power of consumers in modern economies.
What are Retail Sales?
Retail sales refer to the process of selling goods or services directly to consumers for personal use. It is the final stage in the supply chain, where products or services are made available to the general public through various channels such as brick-and-mortar stores, online platforms, or mail-order catalogues. These sales are an essential component of the overall economy, as they indicate consumer spending patterns and contribute significantly to a nation’s gross domestic product (GDP).
Retail sales encompass a wide range of products, including clothing, electronics, groceries, furniture, automobiles, and more. They can take place in physical stores, shopping malls, department stores, supermarkets, and speciality shops, as well as through e-commerce websites and mobile applications.
The process of retail sales involves several key players, each playing a crucial role in getting the products to the consumers:
- Retailers: These are the businesses that purchase goods or services from wholesalers or manufacturers and offer them to consumers at a marked-up price. Retailers can be large chains, small local shops, or online marketplaces.
- Wholesalers: They act as intermediaries between manufacturers and retailers. Wholesalers buy products in bulk from manufacturers and sell them to retailers at a discounted price.
- Manufacturers: They produce the goods or provide the services that eventually reach the consumers. Manufacturers can be involved in mass production or specialized production, depending on the nature of the product.
- Consumers: Ultimately, consumers are the end-users who purchase the goods or services for their personal needs or preferences.
Retail sales play a crucial role in driving economic growth. Healthy retail sales often indicate a strong economy, as they reflect increased consumer confidence and higher disposable income. Retailers and manufacturers closely monitor sales data to make informed decisions about inventory levels, pricing strategies, and marketing efforts.
Governments and policymakers also pay close attention to retail sales figures as part of their economic analysis. They use this data to assess the overall health of the economy, identify trends in consumer behaviour, and formulate policies to support sustainable growth.
What is Personal Consumption Expenditure (PCE)?
Personal Consumption Expenditure (PCE) refers to the total value of goods and services that individuals and households purchase and consume within an economy over a specific period, typically measured quarterly or annually. It is a significant component of a country’s Gross Domestic Product (GDP) calculation and is often used as a key indicator of overall economic health and consumer spending trends.
PCE encompasses a wide range of consumer expenditures, including but not limited to:
- Durable Goods: These are long-lasting items that typically provide value over an extended period. Examples include cars, appliances, electronics, and furniture.
- Non-Durable Goods: These are items that are consumed relatively quickly and have a short lifespan. Examples include food, clothing, personal care products, and gasoline.
- Services: This category covers intangible products that are consumed immediately and provide various benefits. Examples include healthcare services, education, transportation, entertainment, and utilities.
PCE is influenced by various factors, such as changes in personal income, inflation rates, interest rates, consumer confidence, and overall economic conditions. When individuals have higher disposable income and feel optimistic about the economy’s future, they are more likely to increase their spending, leading to a rise in personal consumption expenditure. Conversely, during periods of economic downturn or uncertainty, consumers may cut back on spending, causing a decrease in PCE.
Governments and policymakers closely monitor PCE as it can provide valuable insights into the strength of consumer demand, the potential for economic growth, and the effectiveness of fiscal and monetary policies. Additionally, fluctuations in PCE can also impact businesses and industries, as changes in consumer spending patterns may influence their revenues and profitability.
What is the Consumer sentiment index (CSI)?
The Consumer Sentiment Index, akin to the CCI, measures consumer attitudes towards their current and future financial situation. Survey-based, this index gauges consumer expectations, reflecting their confidence in the economy. Higher sentiment index values generally correspond to increased consumer spending.
What is Saving Rate?
The Saving Rate is the percentage of disposable income that consumers save instead of spending. A higher saving rate might suggest cautious consumer behaviour or economic uncertainty, whereas a lower rate might indicate increased spending and economic confidence.
How Is Consumer Confidence Calculated?
The calculation of consumer confidence involves several key factors, such as the expected financial situation, major purchases, and the consumer confidence indicator, which are derived from consumer confidence surveys.
The first step in calculating consumer confidence involves conducting regular surveys among a representative sample of consumers within the target market. These surveys are designed to gauge consumers’ perceptions and expectations regarding their current and future financial situations. Participants are often asked about their income expectations, employment prospects, and general economic outlook. Additionally, questions related to major purchases, such as buying a car or a house, are included to assess consumers’ willingness to make significant financial commitments.
Once the consumer confidence survey data is collected, economists and analysts use statistical techniques to interpret and calculate the consumer confidence indicator. This indicator is essentially a numerical representation of the overall sentiment among consumers. It is usually presented as an index number, with a baseline value set at a specific period, often referred to as the base year. Changes in the consumer confidence index from this base year can then be interpreted as positive or negative shifts in consumer sentiment.
The consumer confidence indicator is calculated by considering various components from the survey data. These components are carefully weighted to reflect their relative importance in determining overall consumer confidence. For example, responses related to the expected financial situation and major purchases may carry more weight than other less influential factors.
To ensure accuracy and reliability, consumer confidence surveys are typically conducted on a regular basis, such as monthly or quarterly, depending on the frequency required by policymakers and businesses. Continuous monitoring of consumer confidence helps identify trends, potential economic downturns, or signs of economic growth and helps in decision-making at both the governmental and corporate levels.
Monthly Consumer Confidence Index (CCI) in the United States from January 2019 to June 2023
In June 2023, the Consumer Confidence Index (CCI) of the United States stood at 97.18. The CCI in the U.S. began to slowly increase over the latter half of 2022 after a year of decline.
How to Use Consumer Confidence Reports in Forex Trading
In the fast-paced world of forex trading, staying ahead of the game requires a comprehensive understanding of various economic indicators. One such crucial tool that often flies under the radar is the Consumer Confidence Report (CCR). This report, based on consumer opinion surveys, provides valuable insights into the current and future state of the economy. Let’s explore how forex traders can leverage CCRs to make informed decisions in the market.
- Understanding Consumer Confidence Reports:
Consumer Confidence Reports are compiled by analysing consumer opinion surveys, which gauge the sentiment of individuals regarding their financial well-being, the labour market, and their expectations of future developments. These reports are published regularly and are considered a vital component of consumer economic indicators.
- Importance of Consumer Confidence in Forex Trading:
Consumer confidence plays a significant role in forex trading as it directly influences consumer spending indicators. When consumers are optimistic about the economy, they are more likely to spend, leading to increased economic activity. On the other hand, a decline in consumer confidence may result in reduced consumer spending, impacting the overall economic landscape.
- The Expectations Index and its Impact:
Within the CCR, the Expectations Index is a critical element to consider. It reflects consumers’ perceptions of future economic conditions, such as employment prospects, income growth, and business developments. As forex traders, keeping a close eye on this index can provide valuable insights into potential shifts in currency pairs.
- Correlation with Labor Market Data:
Consumer confidence is often closely correlated with the labour market’s health. Positive changes in employment figures tend to boost consumer confidence, leading to increased spending and investment. Conversely, rising unemployment can lower consumer sentiment, affecting currency values.
- Analysing the Trends:
Traders should closely monitor trends in the Consumer Confidence Reports. Consistent improvements in consumer confidence indicate a robust economy, suggesting potential bullish opportunities for the domestic currency. Conversely, a sustained decline in consumer confidence could indicate an economic downturn, signalling bearish possibilities.
- Correlation with Consumer Spending Indicators:
In forex trading, consumer spending indicators are highly relevant as they impact economic growth and inflation rates. As consumer confidence influences spending behaviour, traders should consider the relationship between CCR data and consumer spending indicators to make well-informed trading decisions.
- Timeframe Considerations:
It’s essential to consider the timeframe over which consumer confidence reports are released. Short-term traders may focus on immediate reactions to the data release, while long-term traders might use these reports as part of their fundamental analysis to shape broader strategies.
