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Answer:
Dear
Sally,
I
happen to think that the Confidence Index is an interesting
barometer of what people think. But before you decide
whether or not to factor it into your investing positions,
you should know what it is and how it's put together.
What
it is
It
is actually known as the Consumer Confidence Index
and it measures how positive or negative Americans
feel about the economy, the job market and their own
financial future.
How
it is measured
There
are, in fact, two major consumer confidence measures.
-
The Conference Board, a non-profit business
research organization, takes a survey every month
of 5,000 households. It asks these people 5 basic
questions: (1) their opinion of business
conditions now, (2) six months from now,
(3) their opinion about employment and the
job market now, (4) six months from now and
finally, (5) what they feel their family
income will be in six months -- will it drop, stay
the same or increase.
The Conference Board results of this survey are
reported on the last Tuesday of every month.
Details: There is an easy-to-understand discussion
of this Index, how it is administered, the key questions
and the results at: www.conference-board.org.
You can also sign up to get results automatically
e-mailed to you.
- The
University of Michigan's Survey Research Center
surveys some 500 people every month. It asks them
five similar questions about the economy but also
about interest rates, and, interestingly, if they
think this is an opportune time to make major purchases
(that is, "big ticket items") such as a house, car
or significant appliance (a dishwasher, for example,
not a blender).
The University's final number is reported at the
end of each month.
What
Consumer Confidence Indexes may mean for investors
The
responses to the surveys are keyed against previous
feelings on the same matters -- are conditions better
or worse?
When
the public is feeling positive about the economy and/or
their own financial future, they are more likely to
spend money, take on debt, and buy big ticket items.
That
could translate into more business for companies in
those industries. Please note that I use the word
"could." It is not a given that this will happen but
it often indicates a trend.
Such
demand for key goods can, in turn, convince corporations
that they need to hire more people, invest in new
equipment, and add to their technology and R&D (research
and development) budgets.
On
the other hand, when consumer confidence is sliding,
it typically means that Americans are concerned, even
nervous about the near term. When this is the situation,
they tend to leave their credit cards at home and
businesses, in turn, cut back on both hiring and spending.
At
this same time, investors often shift money from stocks
into bonds, Treasuries and bank CDs.
For
a very clear analysis of how these indexes are compiled
and what they have indicated in the past, I send you
to the St. Louis Federal Reserve Board at: www.stls.frb.org/publications/itv/2003/a/pages/p1-story1.html.
After
reading this information, you can decide whether or
not to use the consumer confidence indexes in making
your investment and savings decisions.
Trivia
Corner
Americans
were so confident in the mid-twenties that two out
of three households put in electricity and promptly
bought lamps, refrigerators, washing machines and
toasters by the truckload.
Cautious
middle-class Americans abandoned their time-honored
fear of debt and became proud consumers of these and
other newfangled inventions, especially the radio.
In November 1920, there was one radio station. By
1923 more than 500 broadcasting systems were in operation.
Think
what happened in 1929. So much for consumer sentiment!
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