US consumer sentiment reaches the highest levels since 2006

The key measure of US consumer confidence has reached a level not seen since over ten years ago, according to recent data released by an industry group. According to the results, Americans are now more confident about the economy, and their spending habits have rebounded to pre-GFC levels.

When consumer confidence is high, consumers make more purchases. When confidence is low, consumers tend to save more and spend less. A month-to-month trend in consumer confidence reflects the outlook of consumers with respect to their ability to find and retain good jobs according to their perception of the current state of the economy and their personal financial situation.

Consumer confidence typically increases when the economy expands, and decreases when the economy contracts. In the United States, there is evidence that the measure is a lagging indicator of stock market performance.

Investors, manufacturers, retailers, banks and government agencies use various assessments of consumer confidence in planning their actions. The ability to predict major changes in consumer confidence allows businesses to gauge the willingness of consumers to make new purchases.

As a result, businesses can adjust their operations and the government can prepare for changing tax revenue. If confidence is dropping and consumers are expected to reduce their spending, most producers will tend to reduce their production volumes accordingly. For example, if manufacturers anticipate consumers will reduce retail purchases, especially for expensive and durable goods, they will cut down their inventories in advance and may delay investing in new projects and facilities. Similarly, if banks expect consumers to decrease their spending, they will prepare for the reduction in lending activities, such as mortgage applications and credit card use.

Builders will plan for the decline in home construction volumes. The government will get ready for the reduction in future tax revenues. On the other hand, if consumer confidence is improving, people are expected to increase their purchases of goods and services. In anticipation of that change, manufacturers can boost production and inventories. Large employers can increase hiring rates. Builders can prepare for higher housing construction rates. Banks can plan for a rise in demand for credit products. Government can expect improved tax revenues based on the increase in consumer spending.