A survey of consumer attitudes concerning both the present situation as well as expectations regarding economic conditions conducted by the University of Michigan. Five hundred consumers are surveyed each month. The level of consumer sentiment is directly related to the strength of consumer spending.
Why do Investors Care?
Strong economic growth translates into healthy corporate profits and higher stock prices. The bond market focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth, which is what happened through much of the nineties. As a result, investors in the stock and bond markets have enjoyed huge gains. If and when the party comes to an end, more than likely a change in the economic trend will be the culprit, and that change might be tipped off by a change in consumer sentiment.
Consumer spending accounts for two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it’s easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer sentiment and retail sales don’t move in tandem month by month.