Why Is Consumer Confidence So Important?

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What is consumer confidence and why is it so important? Consumer confidence is an economic indicator that measures how confident consumers are about the overall state of the economy. That’s easy enough right? Consumer confidence also measures how confident people feel about their own income’s stability. This confidence impacts how they shop and how much they spend. This makes consumer confidence one of the most important indicators for the overall shape of the economy.

When the economy expands, consumer confidence increases. Likewise, consumer confidence decreases when the economy contracts. While consumers don’t usually have perfect information, consumer confidence is considered a lagging indicator of stock market performance.

How Useful Are Consumer Confidence Indicators?

Many of the UK’s investors, manufacturers, retailers, banks and government agencies use a wide range of consumer assessments when planning their actions. Let’s look at an example of this. If weak consumer confidence is indicating a decline in spending, manufacturers will decrease their inventory. Banks will reduce lending activities including mortgages and credit cards. Homebuilders will plan for the decline in home construction volumes and build less homes and the government prepare for a reduction in tax revenues. As you can see, weak consumer confidence plays an important role in the overall economy and touches every industry. When confidence decreases, spending and risk-taking tend to decrease.

Let’s look at another example. Consumer confidence is improving. Manufacturers will increase production and inventory levels. Employers will begin hiring. Builders will prepare for higher housing construction rates and banks will increase lending activity.

Factors That Impact Consumer Confidence

There are even more factors that affect consumer confidence. Consumer spending is impacted by factors like monetary or fiscal policy, inflation, purchasing power and supply of goods. This makes it important for investors and business owners to review important economic indicators if they are to gauge the economy’s overall health. It may be as simple as watching the news or reading the financial report, or following the stock markets and watching for any indicators that the economy is slowing down.

The question remains, are consumers in the UK confident about the economy?

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