From Ken Little,
Your Guide to Stocks.
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The Conference Board Consumer Confidence Index (CCI) shot ahead of all predictions in August.

The group reported Tuesday the index at 105.6. Economists had predicted a decline to 101.5.

The Consumer Confidence Index measures how consumers feel about the upcoming six months and their plans to make purchases (or not).

The companion metric for the CCI is the Consumer Sentiment Index conducted by the University of Michigan. While both indexes measure consumer spending expectations, the CCI is more heavily weighted towards business.

The CSI, which the university released earlier this month showed the comparable gains.

Value to the Investor

What value to the investor is this information and why should you watch for these numbers?

Consumer spending accounts for roughly two-thirds of our economy. When consumers are reluctant to spend, our economy is affected and when they open their pocket books, the economy moves.

These two indexes will give you an idea of where consumer spending is headed in the future. It is important to note that like most indexes you should look at how they trend over a period of four to six months rather than any month-to-month change.

Watch the Trend

Watching a trend will help cancel out sampling errors (the indexes gather data through telephone interviews) and seasonal adjustments.

You can see graphs of these indexes on a number of sites. I like Briefing.com. Go to Calendars and click on Economic Calendars and you will find all the upcoming economic data releases. Click on either the Consumer Confidence Index or the Consumer Sentiment Index and you can see charts showing historical trends.

As one piece of information, consumer sentiment is a predictor of how certain industries may do in the coming months.

For example, falling consumer sentiment/confidence indexes will likely drive automakers to special financing deals as it has in the past when sales were lagging.

Think Toilet Paper

When the consumer indexes are low and trending down, non-cyclical stocks (think toilet paper), tend to do well, while companies that produce less essential goods may suffer.

On the other hand, if the indexes began trending up, look for companies in areas like home entertainment, sporting goods (boats, for example), autos, and so forth to do well.

Strengthening consumer confidence almost guarantees the Fed will continue its slow, but steady pressure to raise interest rates.

Conclusion

The Consumer Confidence Index and the Consumer Sentiment Index are two of the most important economic predictors you can watch. Just remember to watch the trend over several months and don’t get caught up in month-to-month hysteria.

Understanding the importance of consumer spending and it implications for the stock market will help you become a better investor.