Consumer Sentiment Declines in February: What Is It and Why Does It Matter?
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Updated Feb. 11.
Current consumer sentiment indexes:
The University of Michigan Index of Consumer Sentiment’s initial February reading registered at 67.8, down from its January reading of 71.1, according to the survey results released on Feb. 7. The index is now up 36% above its all-time historic low of 50 from June 2022. The university’s Index of Current Economic Conditions decreased to 68.7 in February compared to 74 in January, while the Index of Consumer Expectations decreased to 67.3 compared to 69.3 in the previous month.
The Conference Board’s Consumer Confidence Index went down to 104.1 in January, according to preliminary results released on Jan. 28. In December, the CCI was 109.5. The board’s Present Situation Index — measuring consumers’ current assessment of business and labor market conditions — decreased to 134.3 in January from 144 in December. The Expectations Index — measuring consumers’ short-term outlook for income, business, and labor market conditions — fell to 83.9 compared to 86.5 in the previous month.
The New York Fed’s Survey of Consumer Expectations for January showed that consumer’s inflation expectations are unchanged for the next 12 months and the next three years, according to the report released on Feb. 10. But consumers surveyed forecast price increases for essential goods and services: gas, food, medical care, education and rent. Median household spending expectations are the lowest since January 2021.
What is consumer sentiment?
Consumer sentiment, also known as consumer confidence, is an index of how U.S. consumers are feeling about the current and future state of the economy, and all that folds into the economy: the job market, wages, business conditions and their personal finances. It’s a valuable tool for economists, as consumer sentiment can be used as an early predictor of economic changes.
How people feel about the economy can directly impact the economy, because consumers' attitudes often affect how much they spend on things like food, transportation, household goods, entertainment and more. In 2023, consumers’ personal spending made up 67.9% of the U.S. GDP, or gross domestic product, according to the Federal Reserve Bank of St. Louis. That’s a significant majority of the nation’s GDP, so keeping a close eye on consumer sentiment is key in foreseeing potential economic slumps or rallies.
When the economy is in a recession, consumer sentiment falls. On the flip side, when the economy is expanding, consumer sentiment rises. The index does typically peak before a recession, though. Unlike other indexes, such as the Consumer Price Index (CPI), consumer sentiment isn’t calculated using spending data or hard figures. Instead, economists rely on two major surveys of consumer confidence: The University of Michigan’s Surveys of Consumers and the Conference Board’s Consumer Confidence Survey. Each survey collects the general attitudes and opinions of hundreds of U.S. consumers. Then, those opinions are assigned numeric values and aggregated into one number, or index.
The University of Michigan’s Index of Consumer Sentiment
The Index of Consumer Sentiment is one of three indexes derived from the University of Michigan’s Surveys of Consumers, which started in 1946. Originally conducted annually, the surveys switched to a monthly cadence in 1978. The surveys have a sample size of roughly 600 people selected randomly from the 48 adjoining U.S. states and the District of Columbia.
The surveys include roughly 50 questions covering personal finances, business conditions and buying conditions. From those surveyed, three indexes are produced: the Index of Consumer Sentiment, the Index of Consumer Expectations and the Index of Current Economic Conditions.
The Index of Consumer Sentiment is the most commonly cited index of the bunch. It’s derived from these five questions:
"We are interested in how people are getting along financially these days. Would you say that you (and your family living there) are better off or worse off financially than you were a year ago?"
"Now, looking ahead: Do you think that a year from now you (and your family living there) will be better off financially, or worse off, or just about the same as now?"
"Now, turning to business conditions in the country as a whole. Do you think that during the next twelve months we'll have good times financially, or bad times, or what?"
"Looking ahead, which would you say is more likely: that in the country as a whole we'll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?"
"About the big things people buy for their homes, such as furniture, a refrigerator, stove, television, and things like that. Generally speaking, do you think now is a good or bad time for people to buy major household items?"
Historically, the surveys have been conducted by phone. Starting in July 2024, they'll be conducted online, with researchers aiming for 900 to 1,000 respondents.
The Conference Board’s Consumer Confidence Index
Meanwhile, the Conference Board’s Consumer Confidence Survey was launched in 1967 as a mail survey conducted every other month. Today, the survey is conducted online, on a monthly basis, with a sample size of roughly 3,000 respondents.
The Conference Board issues a five-question survey to calculate three distinct indexes: the Consumer Confidence Index, the Present Situation Index and the Expectations Index. Once the surveys have been completed, each question is given a relative value. Then, those values are compared against their relative values from 1985 — the survey’s benchmark year, with an index set at 100.
The Consumer Confidence Index is the average index for all five questions. The Present Situation Index is calculated using the average indexes for the first two questions, and the remaining three questions determine the Expectations Index.
Present Situation Index
Respondents’ appraisal of current business conditions.
Respondents’ appraisal of current employment conditions.
Expectations Index
Respondents’ expectations regarding business conditions six months hence.
Respondents’ expectations regarding employment conditions six months hence.
Respondents’ expectations regarding their total family income six months hence.
Consumer Confidence Index
This is the average index for all five questions above.
The Federal Reserve Bank of New York’s Survey of Consumer Expectations
The Federal Reserve Bank of New York’s Survey of Consumer Expectations focuses on expectations about economic outcomes.
The survey, which is conducted by NielsenIQ, launched in 2013. It’s an internet-based survey that asks a rotating panel of 1,300 heads-of-household about their expectations of the economy, as well as their own personal finances related to the following categories:
Inflation:
Inflation expectations.
Inflation uncertainty.
Probability of different inflation outcomes.
Home price change expectations.
Home price change uncertainty.
Commodity price change expectations.
Labor market:
Earnings growth expectations.
Earnings growth uncertainty.
Job separation expectations.
Job finding expectations.
Moving expectations.
Expectations of higher unemployment.
Household finance:
Household income growth expectations.
Household spending growth expectations.
Change in taxes.
Change in credit availability.
Debt delinquency expectations.
Expectations of higher interest rate on savings accounts.
Household financial situation.
Expectations of higher stock prices.
Government debt growth expectations.
What is consumer sentiment like right now?
Initial data for February from the University of Michigan released on Feb. 7 shows:
The Index of Consumer Sentiment went down to 67.8, down from its December reading of 71.1.
Current Economic Conditions registered at 68.7, compared to 74 in January.
The Index of Consumer Expectations was at 67.3, compared to 69.3 in January.
Data for January from the Conference Board released on Jan. 28 shows:
The Consumer Confidence Index registered at 104.1 in January, down from 109.5 in December.
The Present Situation Index decreased to 134.3 in January from 144 in December.
The Expectations Index, fell to 83.9 in January, compared to 86.5 in December.
The highlights for January from the Federal Reserve Bank of New York’s Survey of Consumer Expectations released on Feb. 10 shows:
Inflation. Median inflation expectations were unchanged from the previous month in both one-and three-year forecasts (3%). Median inflation expectations for five-years ahead rose by 0.3 percentage point to 3%.
Commodity prices. Year ahead commodity price expectations increased in multiple categories including the price of gas (up 0.6 percentage points to 2.6%); price of food (up 0.6 percentage points to 4.6%); cost of medical care (up 1 percentage point to 6.8%); cost of college (up 0.2 percentage points to 5.9%); and the cost of rent (up 0.5 percentage points to 6%).
Probability of job loss. The mean expectation of job loss over the next 12 months increased to 14.2% in January (up 2.3 percentage points).
Probability of finding a job. The mean expectation of finding a job over the next 12 months increased to 51.5% (up 1.3 percentage points).
Household spending growth. Median expectations of household spending growth over the next year went down to 4.4% (a 0.4 percentage point decline). The New York Fed says it’s the lowest reading in four years.
When do the next consumer sentiment reports come out?
The University of Michigan’s next set of results for its Surveys of Consumers will be released on Friday, Feb. 21. The Conference Board will release its next Consumer Confidence Survey on Tuesday, Feb. 25. The New York Fed will release its next Survey of Consumer Expectations on March 10.
