How Consumer Sentiment Is Measured—and Why It Moves Markets

The Idea That Feelings Drive Economies

Every month, two closely watched numbers land on traders' desks and flash across financial news tickers: the University of Michigan Consumer Sentiment Index and the Conference Board Consumer Confidence Index. Both attempt to answer the same deceptively simple question—how do ordinary people feel about the economy?

The concept traces back to George Katona, a Hungarian-born behavioral economist at the University of Michigan. In the 1940s, Katona argued that consumer spending depends not just on people's ability to buy, but also on their willingness to buy. Traditional economic models tracked income, employment, and prices. Katona wanted to track mood. His insight proved prescient: using early survey data, he correctly predicted the post-war economic boom at a time when conventional models forecast a recession.

Two Surveys, Two Methods

University of Michigan: Surveys of Consumers

Published monthly since 1952, Michigan's index is the older and arguably more influential of the two. The university's Institute for Social Research surveys roughly 1,000 households each month using web-based questionnaires (the survey transitioned from phone interviews in 2024). Respondents answer about 50 questions, but the headline index distills down to just five:

• Are you better or worse off financially than a year ago?
• Will you be better or worse off a year from now?
• Is now a good or bad time to buy major household items?
• How will business conditions be in the next 12 months?
• How will business conditions be over the next five years?

For each question, the percentage of favorable responses minus unfavorable responses, plus 100, yields a "relative score." The five scores are averaged, divided by a 1966 base-period value, and multiplied by 100. The result is the Index of Consumer Sentiment (ICS).

Conference Board: Consumer Confidence Index

The Conference Board, a non-profit research organization, takes a slightly different approach. Its monthly survey reaches 5,000 households and asks respondents to rate current business and employment conditions as positive, negative, or neutral, then repeat the exercise for their expectations six months ahead. Results are benchmarked to a 1985 base year of 100 and split into two sub-indexes: the Present Situation Index (40% weight) and the Expectations Index (60% weight).

Do Feelings Predict Recessions?

Historically, consumer sentiment has offered genuine—if imperfect—warning signals. Research from the Federal Reserve Bank of Chicago found that in four of five recessions studied, the Michigan sentiment index began declining one to two quarters before the downturn officially started. The Conference Board's Expectations Index carries particular weight: readings at or below 80 have historically preceded a recession within a year.

But there is a catch. A Kansas City Fed study found the link between sentiment and actual household spending is "modest." People sometimes say they feel terrible about the economy while continuing to spend freely—a phenomenon economists call the sentiment-spending disconnect. Fear and uncertainty can crush survey scores even when paychecks keep flowing.

Why Markets React Anyway

If sentiment is an imperfect predictor of spending, why do stock markets swing on its release? The answer lies in expectations. Sentiment data arrives before hard economic statistics like retail sales or GDP. Traders treat it as a leading signal—a preview of whether consumers might tighten their wallets. Sharp drops can trigger sell-offs, while surprise rebounds can fuel rallies. The data also influences the Federal Reserve's assessment of economic conditions, giving it an outsized policy footprint.

Moreover, sentiment can become self-fulfilling. If enough consumers believe a recession is coming, they may delay big purchases—new cars, appliances, renovations—precisely the kind of discretionary spending Katona identified as mood-dependent. That pullback can slow the economy for real.

The Bottom Line

Consumer sentiment surveys are less a crystal ball than a thermometer—they measure the economic mood of a nation with reasonable accuracy, even if that mood doesn't always translate directly into action. As George Katona understood eight decades ago, economies are not purely mechanical systems. They are shaped by the psychology of millions of individual decisions, and those decisions begin with a feeling.