Survey of Consumer Sentiment

This is a telephone-based survey of consumers across the states to gauge their confidence regarding personal finances, business conditions and their overall purchasing power.

How important is it?

Since a decline in consumer confidence levels is usually because of a fall in income or wages, a low or falling University of Michigan Sentiment value is considered an early indicator of an economic downturn. Due to this relation, investors, retailers and traders all watch out for the figure for insight into the general health of the economy. In the recent past, the university of Michigan consumer sentiment report have proved to be a clear pointer of things to come since they have been accurate in projecting the GDP. Most investment decisions are therefore made basing on the outcome of the report.

How is it calculated?

Consumer Sentiment is derived from the monthly University of Michigan Surveys of Consumers. According to the University of Michigan and Reuters, each survey contains approximately 50 core questions, each dwelling on a different aspect of consumer attitudes. The core questions cover consumers’ assessments of their personal financial situation, overall economic conditions as well as buying attitudes. The core areas are supplemented by special questions on different consumer related subjects. If the number of positives comments out ways the number of negative sentiments, then the overall sentiment is considered positive and vice versa.

How does it affect forex trade?

Although not directly, the sentiment affects forex rates indirectly since investment decisions are pegged on this survey. Looking at a scenario where the sentiments confirm a low income and purchasing power, most companies may further reduce production since the demand for the same products would be absent. Such a situation leads to the general decline in economic growth, which affects the strength of the currency and the forex rate similarly.

In another case, if the consumer sentiments are upbeat and confirm a high spending ability among consumers, it is likely to signal that inflation could be just round the corner. Such fears may force the Federal Reserve Bank to take actions towards checking any excesses. Such actions may affect the forex rates in a mild way. When the economy is doing very poorly, some companies are likely to exit the economy for fear of making further loses. It is obvious that no trader would target a bankrupt market with their products unless they too want to join the bankruptcy club. It is therefore in this spirit that warning consumer purchasing power may drive investors in to relocating. Massive exits by major companies to other places may lead to serious balance of trade deficit leaving the economy in serious need of foreign exchange reserves. This may lead to serious decline in the value of the dollar internationally.

How does it affect the stock market?

The stock market finds its revenue from consumer spending. For this reason, most traders and investors know that the population’s purchasing power is the road towards economic growth. Unless your investment holdings is dealing with the production of goods and services for export to other markets outside of the U.S. you must take keen interest in the sentiments of the consumer since they will give you the hints on when to increase or to reduce your production. If the economy has been registering growth then the sentiments suddenly start registering low or falling sentiments, it is a clear indication of an impending down turn in the growth. Any smart investors should therefore take the opportunity to take necessary actions to safeguard their investments before the situation worsens.

Judging by the correlation, consumer sentiments are likely to result in great shifts and activities at the stock market. This is mainly because the prices of most shares will be determined by the market’s perception of their profitability in days to come. Given that only the consumers can tell whether they are likely to spend freely or to exercise restraint in expenditure, there can be no better way of telling the future trends of the consumer activity other than getting the consumer’s personal opinions on the matter. Some of the consumers are also investors in their own ways and may even end up buying shares at the stock market. It is therefore likely that f they are upbeat about future expenditure, the prices at the stock market are likely to remain high if they are already high or to rise incase they have been low as the demand fro shares shoot up due to increased purchasing power.

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