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ECONOMY| 12.01.2022

Why measuring consumer confidence helps the economy?

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If consumer confidence falls, the market may enter a recession that could lead to a consumer crisis and therefore an economic crisis.

Confidence is important in all aspects of life, and one of the areas where it becomes particularly relevant is the economy, since many decisions are made according to the perception held with consumers. 

In the current economic system, companies must always strive for maximum performance, and they need to win over as many customers as possible to do so. There is no doubt that the competition is usually intense, so when making decisions that will affect the future of your business, it’s important to get them right. 

It is hardly surprising then that the consumer confidence index has been measured since the second half of the 20th century in the United States.

 

The objective of measuring consumer confidence

The purpose of this painstaking work, which must be done every year, could be considered rather obvious: if you know how each consumer will react, you can predict their movements, which makes it possible to anticipate their needs. With this information, businesses have a wonderful tool for planning, since they have advance knowledge of the scenario in which the company’s future will play out. 

So, when the confidence index rises (numerous methods are used to determine it around the world), it means consumers are optimistic about their household budget. They therefore plan to spend more money to acquire goods and services. On the other hand, if this index is negative, the market will take precautions and prepare for a drop in sales and therefore revenue. 

Obviously, each index goes further and offers more specific insights, since there may be sectors in which expectations are higher than in others. However, they provide an excellent overview of customers’ perceptions regarding their intention to consume.

 

A reflection of what is happening around us

As one might imagine, everything that happens around each consumer impacts the level of confidence they have. Events such as the recent economic crises and the coronavirus pandemic have tended to weigh on peoples’ perception of their economic possibilities. What’s more, recent reports of rising consumer goods prices as a result of transport and energy problems also hamper that confidence. Indeed, such factors lead consumers to be more cautious when investing their money. At times of uncertainty, the tendency is to avoid spending more than what is strictly necessary. 

As can be expected, this reluctance to spend is a vicious cycle for the economic system that prevails around the world: if consumer confidence is lower, companies will reduce their production. This has the potential to impact their human resources, leading to layoffs. And of course, the news of rising unemployment also drags down consumer confidence. 

In situations like these, the question to be asked is: how do you rebuild that confidence? And the correct answer will be crucial in the near future, as recent consumer confidence surveys have been quite discouraging. 

According to the University of Michigan, confidence hit a 10-year low in the United States in November due to inflation, which reduces purchasing power. “Consumers expressed less optimism in early November than in any other time in the past decade due to a combination of escalating inflation and the absence of federal policies that would effectively redress the inflationary damage,” said Richard Curtin, chief economist of UM Surveys of Consumers, as reported by the Mexican newspaper El Economista

In a global context, governments and large multinationals are who must find the strategies necessary to limit negative perceptions as much as possible, so that the consumer crisis (which is usually coupled with an economic crisis) is as mild as possible.

 

Companies and their customers

What’s more, when the situation is complicated, all businesses should do their part to improve it. Firstly, because that way the company will remain profitable; and secondly, because when it comes to boosting consumer sentiment, everything adds up. 

In these cases, companies must generate customer loyalty, since there is no greater proof of confidence than loyalty. That is why most not only strive to keep repeat buyers happy, but also launch initiatives to reward loyal customers who continue to spend money even when the situation is bleak. While these consumers may have lost their confidence in general, they continue to trust in that business, which treats them like “part of the family.” 

However, this is just one of the initiatives often taken to earn consumers’ trust. They are described by Sandra Sotillo, author of the book La era de la confianza. Cómo convertirse en una empresa TrustMaker (The Era of Confidence: How to Become a TrustMaker Company), which was recently released in the market. In it, Sandra Sotillo explains how all companies aim to generate confidence and trust with their customers, but the vast majority find it difficult. 

“Trend reports suggest that the only constant variable is change and its speed. However, the uncertainty caused by this change affects our lives. That’s why we are in the era of confidence. An era in which the people and companies that know how to generate confidence will have a great competitive advantage. This change in era requires a ‘new way of doing business.’ It requires companies to transform themselves and be ahead of their time in a context marked by a new perspective of business success, based on ethical performance and the generation of shared value,” she explained in an interview on the website Soziable.es.

Therefore, consumer confidence is clearly one of the factors that can drive the economy or slow it down.