Consumer Sentiment vs Confidence: Key Differences

Consumer sentiment and consumer confidence are two terms that are often used interchangeably, but they measure different things. In short, consumer confidence is a broad measure of how people feel about the overall economy, while consumer sentiment is a more specific measure of how people feel about their own personal finances and spending intentions. Both are important indicators for economists, businesses, and policymakers, but they are derived from different surveys and used for different purposes.

Formula

The calculator above simply computes the difference between the two indices and their average. The formula is:

Difference = Consumer Confidence Index − Consumer Sentiment Index

Average = (Consumer Confidence Index + Consumer Sentiment Index) / 2

Where:

• Consumer Confidence Index (points) – a measure of overall economic optimism, usually based on a survey of consumers’ current and future expectations about business conditions, employment, and income.
• Consumer Sentiment Index (points) – a measure of personal financial attitudes, based on a survey of consumers’ views on their own finances, buying conditions, and short-term expectations.

Both indices are typically normalized to a base year value of 100, so values above 100 indicate more optimism than the base year, and values below 100 indicate less optimism.

Worked Example

Suppose the Consumer Confidence Index is 110 and the Consumer Sentiment Index is 95. Using the default values from the calculator (100 for both), the difference is 0 and the average is 100. But let’s use the example values:

1. Difference = 110 − 95 = 15 points. This means confidence is 15 points higher than sentiment.
2. Average = (110 + 95) / 2 = 102.5 points. This is the midpoint of the two indices.

The calculator with these inputs would show a difference of 15 points and an average of 102.5 points.

Background: Where the Terms Come From

The two terms come from two major U.S. surveys that have been running for decades. The Consumer Confidence Index is published by The Conference Board, a business research organization, and has been released monthly since 1967. The Consumer Sentiment Index is published by the University of Michigan’s Survey Research Center, and has been released monthly (and sometimes more frequently) since 1946. Both surveys ask a series of questions about the economy and personal finances, but they weight the answers differently.

The Conference Board’s survey focuses more on current business conditions and the labor market, while the Michigan survey emphasizes personal financial situations and buying conditions for large items like cars and houses. This difference in focus is why the two indices can diverge: for example, a person might feel good about the overall economy (high confidence) but still be worried about their own job security (lower sentiment).

How They Are Measured

Each survey uses a different methodology, but both involve asking a sample of consumers a series of questions. The Conference Board’s survey asks five questions: two about current conditions (business conditions and employment) and three about expectations (six months ahead for business, employment, and income). The Michigan survey asks about personal finances, business conditions, and buying conditions for large household items.

The responses are then compiled into an index number, with a base year set to 100. For The Conference Board, the base year is 1985; for the University of Michigan, the base year is 1966. This means a reading of 100 in each index reflects the level of optimism in that base year, not a perfect comparison between the two.

Both indices are released monthly, and they are closely watched by financial markets because they can signal changes in consumer spending, which drives about two-thirds of U.S. economic activity.

How to Choose Which One to Use

If you are an economist or a business owner, you might use one over the other depending on what you need to predict. Here are some guidelines:

• Use Consumer Confidence if you are interested in the overall economic outlook, especially the labor market and business conditions. This index tends to correlate more with employment data and stock market performance.
• Use Consumer Sentiment if you are interested in personal spending behavior, especially on big-ticket items like cars, homes, and appliances. This index tends to correlate more with actual consumer spending.
• Use both if you want a fuller picture. When the two diverge significantly, it can indicate that consumers feel good about the economy but not about their own finances, or vice versa.

For example, if you are a car dealer, you might pay more attention to consumer sentiment because it directly asks about buying conditions. If you are a policymaker worried about a recession, you might watch consumer confidence because it reflects broader economic optimism.

Common Misconceptions and Mistakes

One common mistake is assuming that the two indices should always move together. In fact, they often diverge, and that divergence can be informative. For example, during the 2008 financial crisis, both indices fell sharply, but consumer confidence fell faster and deeper than consumer sentiment because the crisis was largely a business and employment shock. In contrast, during the 2020 pandemic, consumer sentiment fell more than confidence because people were worried about their personal health and finances, even though the broader economy had government support.

Another misconception is that these indices predict the stock market. While they can influence market sentiment in the short term, they are not reliable predictors of stock returns. They are better used as indicators of consumer spending, which is a key driver of economic growth.

When interpreting the numbers, remember that the base year matters. A reading of 100 in 2024 does not mean the same thing as 100 in 1985. Also, the surveys are based on a sample of a few thousand people, so they have a margin of error. Small changes from month to month may not be statistically significant.

Comparisons: Confidence vs. Sentiment in Practice

To see the difference in practice, consider a hypothetical scenario: The economy is growing, unemployment is low, but inflation is high. The Conference Board’s confidence index might stay high because people have jobs and the economy looks good. The Michigan sentiment index might fall because people feel the pinch of higher prices on their personal budgets. This is exactly what happened in the early 2020s, when inflation outpaced wage growth, and sentiment dropped even as confidence remained relatively stable.

Another example: If a major employer announces layoffs, the Conference Board’s index might drop sharply because it directly asks about employment conditions. The Michigan index might not drop as much if the layoffs are in a different region or industry, and people still feel secure in their own jobs.

These differences are why economists often look at both indices together. A persistent gap between the two can signal that consumers are feeling a disconnect between the overall economy and their personal situation, which can lead to changes in spending behavior.

Limitations and Alternatives

Both indices have limitations. They are based on surveys, so they reflect perceptions, not actual behavior. People may say they feel good about the economy but still not spend. Also, the surveys have a relatively small sample size (around 500 to 3,000 respondents), which can introduce sampling error.

There are alternative measures of consumer attitudes, such as the Consumer Comfort Index by Bloomberg, which uses a different methodology and a smaller sample, or the OECD Consumer Confidence Indicator for international comparisons. For more direct measures of spending, you might look at retail sales data or personal consumption expenditures from government statistics.

For most purposes, the Conference Board’s Consumer Confidence Index and the University of Michigan’s Consumer Sentiment Index are the two most widely cited and reliable measures. They are free to access (with a lag) and have a long history, making them useful for trend analysis.

Frequently Asked Questions

What is the main difference between consumer confidence and consumer sentiment?

The main difference is that consumer confidence measures how people feel about the overall economy, especially business conditions and employment, while consumer sentiment measures how people feel about their own personal finances and buying conditions. Confidence is more about the big picture; sentiment is more about the individual.

Which index is more accurate?

Neither is inherently more accurate; they measure different things. The Conference Board’s index is often considered more reliable for tracking labor market perceptions, while the Michigan index is better for predicting consumer spending on big-ticket items. Both are well-respected and widely used.

Why do the two indices sometimes move in opposite directions?

They can diverge because they ask different questions. For example, if the economy is growing but inflation is high, confidence might stay up while sentiment falls. Or if there are layoffs in one sector but the stock market is booming, confidence might drop while sentiment stays stable. Divergence often signals that consumers feel a disconnect between the macro economy and their personal situation.

How often are these indices released?

Both are released monthly. The Conference Board’s Consumer Confidence Index is typically released on the last Tuesday of the month. The University of Michigan’s Consumer Sentiment Index is released in two parts: a preliminary reading (usually mid-month) and a final reading (usually at the end of the month).

Can I use these indices to predict the stock market?

No, they are not reliable predictors of stock market returns. They can influence short-term market sentiment because traders watch them, but they are better used as indicators of consumer spending, which is a key component of economic growth. Many studies have found little to no predictive power for stock prices.

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in t | Time period | months | 1 | 0
in c | Consumer confidence index | index points | 100 | 0
in s | Consumer sentiment index | index points | 100 | 0
out diff | Difference (confidence - sentiment) | points | c - s | 2
out avg | Average of the two | points | (c + s) / 2 | 2