Consumer sentiment is an aggregate measure of how individuals feel about their finances and the economy as a whole. Also called consumer confidence, this economic indicator can serve as a barometer for future consumer behavior — particularly spending and saving patterns — which, in turn, influence broader economic trends.
For instance, when consumer confidence is higher, people tend to be more optimistic, which is reflected in their spending and other financial behaviors. Gauging prevailing consumer attitudes helps policymakers, businesses and investors assess potential economic trends and make decisions accordingly.
Why Is Consumer Sentiment Important?
Understanding consumer sentiment can help us analyze market shifts, predict economic growth and identify potential challenges such as economic downturns and inflation. In essence, consumer confidence insights can be helpful for financial planning, forming policies and implementing legislation.
Consumer Sentiment Measurement Sources
One of the most widely recognized measures of consumer confidence is the University of Michigan Consumer Sentiment Index (UMCSI). The index is derived from monthly surveys of households that gauge attitudes on several topics, including:
— Personal finance
— Business condition
— Overall economic outlook
Another significant source is the Conference Board’s Consumer Confidence Index (CCI). Similar to the UMCSI, this index surveys households to measure their confidence in current economic conditions and their expectations for the future.
This index compiles sentiments on job prospects, income expectations and spending plans. Like the UMSCI, the CCI provides several valuable data points to help understand consumer behavior.
What Influences Consumer Sentiment?
Factors that influence consumer sentiment can range from economic conditions to geopolitical events. Key drivers include employment, inflation, interest and wage growth, which directly affect individuals’ financial stability and purchasing power.
For example, rising unemployment or inflation may lead to lower consumer confidence as households worry about potential economic hardships. Conversely, low unemployment and economic growth can bolster optimism.
“Any time there is a change in government, there is some uncertainty about the future, ranging from pessimism to unwarranted optimism. When consumers are uncertain about the environment, they are less likely to make major investment decisions. I think that most people will keep a very close eye on the markets in the next few weeks,” says Subimal Chatterjee, a teaching professor who researches consumer behavior at Binghamton University.
Additionally, global events like political instability, natural disasters or pandemics can significantly impact consumer sentiment, as they create uncertainty and disrupt normal economic activity.
Media coverage of these events also plays a role — positive or negative news shapes how consumers perceive the economy and their personal financial situations.
Where Is Consumer Sentiment Now?
As of Jan. 10, 2025, the US Index of Consumer Sentiment (ICS), provided by University of Michigan, published its most recent updated report showing consumer sentiment is at 73.20, down from 74.00 last month and down from 79.00 one year ago (the index is normalized to a value of 100).
Inflation expectations for the upcoming year rose to 3.3% in January, up from 2.8% recorded in December. Long-run inflation expectations also rose to 3.3% from 3% in December.
One of the main factors dropping consumer confidence is inflation. Currently, policy items such as tariffs and mass deportation are on the table, which economists have warned could contribute to rising prices in the U.S.
[Related:What Will Cost the Most Under Trump’s Tariffs?]
Current Trends Threatening Consumer Confidence
One of the most pressing issues is inflation, which has steadily risen over the past few years. Higher inflation rates reduce consumers’ purchasing power, making everyday goods and services more expensive. This negatively impacts household budgets and tends to create financial stress.
[Inflation Calculator: See How Much Inflation Is Costing You]
While employment numbers have remained stable in recent months, signs of a weakening job market — like declining hiring rates or increased layoffs — can affect consumer confidence. A less secure labor market tends to result in more cautious spending as individuals prioritize saving over spending.
What Should I Do When Consumer Confidence Drops?
When consumer confidence drops, there’s nothing specific you need to do. However, understanding that decreasing consumer sentiment could signal an economic downturn can help you prepare.
For example, this may include reassessing your personal budget, cutting down on nonessential expenses and increasing savings to create a financial safety net. Building an emergency fund during economic uncertainty can help minimize the financial damage from job loss or medical emergencies.
[Related:How Much Should You Save In an Emergency Fund?]
On a broader scale, policymakers can use a decline in consumer sentiment as a signal to roll out measures to stabilize the economy. This could include lowering interest rates, offering stimulus packages or implementing policies that promote job creation and economic growth.
What Should I Do When Consumer Confidence Increases?
Recognizing that rising consumer sentiment can signal economic growth is another good time to take advantage of the opportunities that come with a growing economy. This may include exploring new investment options, allocating funds toward long-term goals or taking calculated risks to grow your wealth.
Higher consumer confidence often leads to a stronger job market and increased spending, creating better conditions for individuals and businesses. This could be a great time to freshen up your résumé and look for new employment — or, check into advancements with your current employer.
On a larger scale, policymakers might take action to keep the economy growing. They can do this by launching initiatives to improve infrastructure, support innovation or promote business growth.
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Consumer Sentiment: What It Is and Why It Matters originally appeared on usnews.com
