Consumer Sentiment Drops in July: What Is It and Why Does It Matter?

What is consumer sentiment?

Consumer sentiment, also known as consumer confidence, is an index of how U.S. consumers are feeling about the current and future state of the economy, and all that folds into the economy: the job market, wages, business conditions and their personal finances. It’s a valuable tool for economists, as consumer sentiment can be used as an early predictor of economic changes.

How people feel about the economy can directly impact the economy, because consumers' attitudes often affect how much they spend on things like food, transportation, household goods, entertainment and more. In 2023, consumers’ personal spending made up 67.9% of the U.S. GDP, or gross domestic product, according to the Federal Reserve Bank of St. Louis. That’s a significant majority of the nation’s GDP, so keeping a close eye on consumer sentiment is key in foreseeing potential economic slumps or rallies.

When the economy is in a recession, consumer sentiment falls. On the flip side, when the economy is expanding, consumer sentiment rises. The index does typically peak before a recession, though. Unlike other indexes, such as the Consumer Price Index (CPI), consumer sentiment isn’t calculated using spending data or hard figures. Instead, economists rely on two major surveys of consumer confidence: The University of Michigan’s Surveys of Consumers and the Conference Board’s Consumer Confidence Survey. Each survey collects the general attitudes and opinions of hundreds of U.S. consumers. Then, those opinions are assigned numeric values and aggregated into one number, or index.

The University of Michigan’s Index of Consumer Sentiment

The Index of Consumer Sentiment is one of three indexes derived from the University of Michigan’s Surveys of Consumers, which started in 1946. Originally conducted annually, the surveys switched to a monthly cadence in 1978. The surveys have a sample size of roughly 600 people selected randomly from the 48 adjoining U.S. states and the District of Columbia.

The surveys include roughly 50 questions covering personal finances, business conditions and buying conditions. From those surveyed, three indexes are produced: the Index of Consumer Sentiment, the Index of Consumer Expectations and the Index of Current Economic Conditions.

The Index of Consumer Sentiment is the most commonly cited index of the bunch. It’s derived from these five questions:

1. "We are interested in how people are getting along financially these days. Would you say that you (and your family living there) are better off or worse off financially than you were a year ago?"

2. "Now, looking ahead: Do you think that a year from now you (and your family living there) will be better off financially, or worse off, or just about the same as now?"

3. "Now, turning to business conditions in the country as a whole. Do you think that during the next twelve months we'll have good times financially, or bad times, or what?"

4. "Looking ahead, which would you say is more likely: that in the country as a whole we'll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?"

5. "About the big things people buy for their homes, such as furniture, a refrigerator, stove, television, and things like that. Generally speaking, do you think now is a good or bad time for people to buy major household items?"

Historically, the surveys have been conducted by phone. Starting in July 2024, they'll be conducted online, with researchers aiming for 900 to 1,000 respondents.

The Conference Board’s Consumer Confidence Index

Meanwhile, the Conference Board’s Consumer Confidence Survey was launched in 1967 as a mail survey conducted every other month. Today, the survey is conducted online, on a monthly basis, with a sample size of roughly 3,000 respondents.

The Conference Board issues a five-question survey to calculate three distinct indexes: the Consumer Confidence Index, the Present Situation Index and the Expectations Index. Once the surveys have been completed, each question is given a relative value. Then, those values are compared against their relative values from 1985 — the survey’s benchmark year, with an index set at 100.

The Consumer Confidence Index is the average index for all five questions. The Present Situation Index is calculated using the average indexes for the first two questions, and the remaining three questions determine the Expectations Index.

Present Situation Index

1. Respondents’ appraisal of current business conditions.

2. Respondents’ appraisal of current employment conditions.

Expectations Index

1. Respondents’ expectations regarding business conditions six months hence.

2. Respondents’ expectations regarding employment conditions six months hence.

3. Respondents’ expectations regarding their total family income six months hence. 

Consumer Confidence Index

This is the average index for all five questions above.

What is consumer sentiment like right now?

Preliminary July data from the University of Michigan’s Index of Consumer Sentiment, released July 12, shows the index dipped from its June reading. It registered at 66.0, which is a 3.2% drop from its June reading of 68.2.

The index measuring Current Economic Conditions registered at 64.1 in July, compared to 65.9 in June. And the Index of Consumer Expectations was at 67.2 — a 3.4% decrease from June, when it was at 69.6.

Meanwhile, the Conference Board’s Consumer Confidence Index dipped in June. The index reached 100.4 in June, compared to 101.3 in May. Its Present Situation Index increased to 141.5 in June, compared to 140.8 in May. And the Expectations Index fell to 73.0, compared to 74.9 in the previous month.

» MORE: Current rate of inflation and why it matters

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