For the purpose of the paper, I took an article from the CNBC regarding the Consumer Confidence Index. The article is headlined as- “Consumer confidence strengthens in July, beating expectations for a drop”. The topic is the Consumer Confidence Index. It is an economic indicator which measures the level of optimism and pessimism of the consumers with respect to their confidence in the economy today and in the future. CCI evaluates the perception of the consumer regarding the employment and current business condition along with their future business, income and employment expectations. In the U.S. CCI is prepared by the Consumer Confidence Board through the Consumer Confidence Survey and is a leading indicator of the health and stability of the U.S. economy (Staff, 2018).
The article was published on 25th July, 2017, stating that the Consumer Confidence Index rose in July to 121.1 but according to the forecast by Reuters, the optimism of the consumers must have declined to 116.5. This was an unexpected increase in the CCI and was in fact the highest level of Consumer Confidence since 2001, i.e. it was a 16 year high despite the expectations for a fall in CCI. An increase in CCI would mean that the consumers perceive the economy to be in the expansion phase for the next 6 months. They expect better employment opportunities, business conditions and high level of incomes in the future. The current perception of the business and employment condition is optimistic and hence the CCI has risen to a 16 year high. According to the statistics provided in the article, the percentage of consumers who perceived the current business conditions to be good rose to 33.3% from 30.6% and the ones who perceived bad conditions were unchanged at 13.5%. On the other hand 34.1% consumers expected plentiful jobs in July as compared to 32% in the last month. The consumers were optimistic about the business conditions over the next six months as 22.9% expected better business condition in the future six months as compared to 20.1% in June (Sheetz, 2018).
The topic in this article is important to me because the article not only addresses the 16 year high CCI since 2001 but also the fact that the CCI increased when a drop was forecasted. This indicates higher economic growth. An optimistic CCI is an indication of higher consumer spending and highser investment over the next six months. An upturn means that there is an expectation of increase in employment opportunities, higher wages and an increase in the demand and supply of capital. An optimistic CCI is also an indicator of rising inflation in the economy.
Others must also understand about CCI because it is one of the leading U.S. economic indicator and it helps in monitoring the economic activities and also warns the economy about the turning points in the business cycle. It shows the confidence of the citizens in their economy and also consumer’s confidence about the stability of their income. It shapes the spending and saving decision which further impacts the business cycle. The economic fluctuations are primarily attributed to changes in CCI. Consumer decision often reflects the macroeconomic conditions of the economy and at times it is merely a representation of the animal spirits notion as outlined by Keynes, i.e. the psychological factors (like the willingness to spend) which may not be considered in the economic variables.
Mankiw has outlined ten principles of Economics to explain the economic decisions. Few of these ten principles can be used to explain the issues or factors present in this article.
- Rational people think at the margin: this principle is used to explain the choice that the consumers make in their daily lives. People always make decisions after considering the marginal benefit and marginal cost. A good or a service is bought only if there is an increase in marginal satisfaction. Here, an optimistic CCI means that the consumers are willing to spend and invest. Consumers must have found an increase in satisfaction or the marginal benefit must be greater than marginal cost of the current and future consumption which led to a positive CCI.
Ø Government can sometimes improve market outcomes: An optimistic CCI is an indication of increasing inflation and a pessimistic CCI indication recession. Government can intervene to control the economic activities. If the economy is in a downward phase and CCI is low, then government can boost the economy by increasing expenditure to improve market expectations and to boost income and employment in the economy.
- Society faces a short-run trade-off between Inflation and unemployment: There is always a trade-off between income and employment. When CCI improves then the increase in spending and more employment opportunities along with higher wages leads to inflation. A low level of unemployment is always associated with higher inflation and vice-versa.
The Wall Street Journal also published an article on the same topic with the headline “U.S. Consumer Confidence Rose in July” (Chaney, 2018) and Financial Times also published an article stating- “U.S. consumer confidence rises in July, survey shows” ("US consumer confidence rises in July, survey shows", 2018) . Both the articles are consistent with the initial article and agree with the findings of the initial article by CNBC.
Chaney, S. (2018). U.S. Consumer Confidence Rose in July. Retrieved from https://www.wsj.com/articles/u-s-consumer-confidence-rose-in-july-1500991992
Sheetz, M. (2018). US consumer confidence hits 16-year high. Retrieved from https://www.cnbc.com/2017/07/25/july-us-consumer-confidence.html
Staff, I. (2018). Consumer Confidence Index - CCI. Retrieved from https://www.investopedia.com/terms/c/cci.asp
US consumer confidence rises in July, survey shows. (2018). Retrieved from https://www.ft.com/content/dc030b16-b72b-3745-9732-940a6756315