What is a Consumer Confidence Index and How Can You Trade It

When it comes to Economic data, most of them report about past activities, like Gross Domestic Product, unemployment, and Consumer Price Index. The Index of Consumer Confidence differs in a sense, in that it is a forward-looking indicator.
In the USA, this measure is published by the Conference Board. The index is updated by monthly intervals and the data is collected by interviewing 5,000 US households. Actually, CCI surveys have quite a long history going all the way back to 1967.
Besides other economic measurements, the Federal Reserve also takes the CCI index into account during its decision-making process. Consequently, analyzing the latest Consumer confidence reports can be just as useful for a trader as researching the latest GDP and CPI numbers.
So how can we use CCI as a Forex indicator? The sustained decline in consumer confidence can be the first sign of weakening economic activity before it is later confirmed by lower GDP numbers. This can alter the policies of central banks.
For example, under normal circumstances, if the inflation rate is well above 2% and unemployment is low, the Federal Reserve might consider the interest rate hike. However, at the same time, the CCI indicator might be in a decline. Therefore, the Central Bank might judge the economy to be weak and abstain from any changes.
On the other hand, even under the low inflation environment, the Central Bank board members might abstain from implementing the interest rate cuts, if they see the signs of improving consumer confidence. So this can go in both ways.

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Forex CCI Indicator Explained

Each month the Conference Board organizes a survey of 5,000 households and asks them for their opinions on five issues:
 Understanding the consumer confidence index
  • Current business conditions
  • Current employment conditions
  • Business conditions for the next 6 months
  • Employment conditions for the next 6 months
  • Total family income for the next 6 months
All participants of this survey have only three options to respond to each question: ‘Positive’, ‘Negative’, or ‘Neutral’. The results from those households are summed up, calculating the relative value of positive and negative replies. Eventually, this is compared to the benchmark year of 1985, which always has a value of 100.
They have chosen this particular year because by that time the economic performance was moderate, close to long term average. Obviously, setting the benchmark during the Economic boom or low point of recession can produce very misleading results.

For example, by the end of March 2020, the CCI in the US stands at 120. This shows that the proportion of positive household responses was 20% higher than the benchmark year.

How does CCI affect the Economy?

As we can see from the above, 40% of the questions from this survey address the present economic conditions when the remaining 60% focuses on future expectations. So essentially, the Consumer Confidence Index is mostly a forward-looking indicator. In order to understand how consumer expectations affect the overall economy, let us take a look at the composition of the Gross Domestic Product.

GDP consists of four elements:
  • Consumption - Based on Household Spending
  • Investment - Spending by Businesses
  • Government Spending - Including Federal, State, and local authorities
  • Net Exports - a balance between imports and exports
In the majority of countries, Consumption is the largest component. In the US, this makes up at least 2/3 of the entire GDP. Consequently, if consumers lose confidence in the economy, then they will spend less money.
So even if the US households across the country decide to cut their expenditures slightly, say by 3%, then this has the potential to reduce GDP by as much as 2%. If consumers get more cautious and slash spending by 9%, then this can have a -6% negative effect on economic growth.
The declining consumer confidence also can have a major influence on the other component of GDP: Investment. If the business leaders see the customers cutting back on their consumption and the sales of their companies stagnate, this can have major consequences. They might decide to reduce their advertising expenses, inventory purchases, and eventually even resort to laying off some employees.
Faced with falling consumer confidence the government might try to intervene and raise spending. In the short term, this might reduce the scale of the recession, however, this may not be a viable long term strategy. Essentially, without Economic growth, this will only make the budget deficit much bigger. As a result of the weak economy, the currency falls.

The opposite is true for the rising Consumer Confidence environment: feeling more confident about the economy,  households spend more, businesses are more open to considering increasing advertising budget and inventory investments. The government can use this opportunity to improve its fiscal balance. All those factors can help the currency to appreciate.
The only potential downside of rising Consumer Confidence can be found in the category of net exports. The households might import more goods and services from abroad if they feel optimistic about the economy. For some countries, the net exports do not represent a large portion of GDP and therefore have a little significance. However, this is something to keep in mind when dealing with such export-oriented countries as China and Germany.
Considering those factors can be helpful when formulating the Forex CCI trading strategy. In general, a persistently falling Consumer confidence index can be a sign of an upcoming economic downturn.

Trading with CCI Forex indicator

So how would any CCI trading system operate? When analyzing the fundamentals of any Forex pair, it might be helpful to consider the latest consumer confidence indicators with both currencies. Most useful here is to look for the pairs with the diverging CCI picture.
If a given country faces a persistent decline in consumer confidence, then the local Central Bank might consider cutting the key interest rate and may even resort to other easing measures.
One way CCI is most useful is that it can point to the changing of economic conditions, before Gross Domestic Product, unemployment rate, and other indicators do. Central banks officially never aimed to maintain some particular level at the Consumer Confidence Index, yet they still take its major changes into account.
So essentially, traders could identify the currencies with rising consumer confidence and place their position in such a way to benefit from their appreciation.
The latest data of the Consumer Confidence Index is widely available online. Conference Board Website is one place where one can check and download the latest CCI indicators for Forex trading.

Reasons behind the high volatility of CCI

By its nature, the Consumer Confidence index is very volatile. This becomes more apparent if we take a look at the US historical data. Analyzing the past data is essential for any CCI Forex trading strategy.
Forex CCI indicator explained
As we can see from the chart above, by the end of 1995 the US Consumer Confidence Index stood near 100 level, almost the same as in the benchmark year of 1985. By 1999, it reached a high mark of 140. From the following year, the index started to decline, even before the start of the recession, falling to 80 by 2002.
After that, the index started to recover and in 2004-2006 managed to stay slightly above the benchmark level of 100.
As the subprime mortgage crisis entered the picture in 2007, CCI started to collapse, and within a year, it fell all the way down to 38.
Another cycle of recovery followed, with consumers slowly but steadily gaining confidence. From 2017 the index managed to rise above 120, the first time since 2000, and mostly managed to keep to that level. The latest report also shows 120, so at first glance, it might seem that the index experienced very little change.
However, it can be useful to point out that the latest CCI level is 12.6 points lower, compared to just a month ago. Even for such a volatile measure, like the Consumer Confidence Index, this is a very noticeable decline, for such a short period of time. This can be a testament to the fact that the recent Coronavirus concerns affect the economic perceptions and expectations of US households.
If this trend continues, it can easily turn into a self-fulfilling prophecy. This scenario can develop in four stages.
  1. Because of health and economic concerns, consumers lose confidence, reduce their spending, and expect a recession.
  2. Stock Market collapses, wiping out several years worth of gains.
  3. Faced with stagnating or falling volume of sales, businesses turn to cost-cutting and layoffs, further eroding consumer confidence.
  4. The latest GDP numbers confirm the beginning of the recession and expectations become a reality.
Both in the case of 2001 and 2008 recessions, the collapsing Consumer Confidence provided investors with an early warning sign of crisis. This demonstrates that in Forex, CCI can have a major predicting power for future economic activity and consumer behavior.

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CCI trading guide - Key Takeaways

  • CCI plays a key role in the Forex Market. As a result, with most of the currency pairs, perceived upcoming policy changes are already priced in, by the time of official announcement.
  • A relatively small variation in the Consumer Confidence Index usually does not foretell any major economic change. However, for most market participants any change more than 5% can be notable.
  • Usually, CCI is much more volatile than most of the other Economic indicators. By the end of 1999, it had reached as high as 140 and collapsed below 40 at the time of the 2008 great recession.
Index of consumer confidence

FAQ: Understanding Consumer Confidence Index

Is the Consumer Confidence index measured differently in Germany?

GfK (Growth from Knowledge) consumer climate index is one of the famous measures of consumer confidence in Germany. According to GfK website, respondents of the survey must comment on:
  • The personal financial situation over the last 12 months
  • The personal financial situation over the next 12 months
  • The general economic situation over the last 12 months
  • The general economic situation over the next 12 months
  • Major Purchases
Similarly, as in the case of the US, the GfK calculates the relative value of positive and negative responses and compares it to the level of the benchmark year. This measure differs from its American counterpart in a way that it utilizes the negative numbers from a measurement. For example, during 2002-2003, the GfK consumer Climate for Germany collapsed and fell below zero, ending up at -3.50 level.
Respondents are also asked to make a comment regarding their savings, however, it is not included in the overall consumer climate index.

In which periods did CCI have all-time highs and lows?

From 1995 as the economic conditions improved, the US Consumer Confidence index increased steadily, finally reaching 144.70 in May 2000, which was an all-time high.
As the great recession of 2008 unfolded, this indicator started to collapse, by February 2009 it fell to an all-time low of 25.30. This represents a 5.7 times lower level, compared to the high mark of May 2000. So as we can see, the index can experience a great deal of volatility over the long term.

Does collapsing CCI always point to recession?

This depends upon the scale of decline in the index. Slight variations are actually very common, so they usually do not point to some major change. However, as we can see from the CCI chart, large declines do not happen for no reason. The detailed analysis of the data we have has shown that previous significant recessions have been preceded by collapsing consumer confidence.
However, it might be useful to keep in mind that not all CCI declines are followed by a recession. Going back to the US Consumer Confidence Index chart, we can see that back in 1998 there was some notable decline by 10 points. It ended up being only a temporary setback, with the CCI recovering during the next year and by December eventually surpassing 140.

How accurately can CCI predict the upcoming changes in GDP and CPI figures?

The household perception of the economy and their expectations has a very strong correlation with consumer spending, the largest component of GDP. It can also have an influence on the decision making of many businesses and by extension, on the Investment component of the equation. Consequently, analyzing the Consumer Confidence Index can be helpful for making predictions for future Gross Domestic Product growth levels.
Things are not so obvious in the case of a Consumer Price Index. Strengthening the economy usually increases the demand for goods and services, which leads to price pressures. This is what economists call ‘demand-pull inflation’.
However, price gains are not always connected to a strong economy. Sometimes this process can be caused by raw materials becoming more expensive, such as Oil, metals, and other commodities.
Fuel price dynamics are a useful example of this. After collapsing below $50 during the great recession, the price of Crude Oil started to recover and by May 2011 had once more surpassed the $110 mark. Besides the obvious effect on the transportation industry, this also had a notable influence on manufacturing and agricultural products. Higher fuel prices made the production prices more expensive.
By that time, the US economy was still in the recovery stage, with the Consumer Confidence Index still struggling near 60 levels.
At the same time, the EU was in the middle of the sovereign debt crisis. Many financial experts even openly discussed the possibility of the Eurozone breakup. Basically, the Economy in the developing countries was still quite weak.
Despite that, the higher Oil prices pushed inflation higher, with Eurozone HICP exceeding 3%, leading to ECB hiking rates twice, in an effort to reduce those price pressures.
So as we can see from the above-mentioned example, the Consumer Confidence Index is not always a reliable indicator of upcoming changes in the inflation rate.

In what way does the Canadian Consumer Confidence Index differ from its US counterpart?

According to the Canadian Conference Board website, the consumer confidence survey asks only 4 questions to respondents:
  • Considering everything, would you say that your family is better or worse off financially than six months ago?
  • Again, considering everything, do you think that your family will be better off, the same or worse off financially six months from now?
  • How do you feel the job situation and overall employment will be in this community six months from now?
  • Do you think that right now is a good or bad time for the average person to make a major outlay for items such as a home, car, or another major item?
The benchmark year of the index is 2014, which has a base value of 100. The report is published on a monthly basis.
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