Consumer Confidence

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PREDICTING CONSUMER CONFIDENCE

THE CHALLENGE

There are two organizations that issue a Consumer Sentiment Index each month that effectively acts as a meter for consumers’ level of confidence in the state of the country and the certainty of the future. Time has proven that when consumers feel confident in their futures, they tend to spend more money and thereby drive economic growth. Conversely, when consumers are unsure, they tend to save and perhaps stall the economy. This then triggers secondary reactions as fixed income markets respond, equities shift and foreign demand for the dollar grows or weakens based on perceived economic growth.

Due to its predictiveness, many investors use the Consumer Sentiment Index to guide their investment strategies and portfolios ahead of the market’s reaction. Sometimes, however, by the time the readings are released, it’s too late.

After years of using the Consumer Sentiment Index to varying levels of success, a large investment fund sought a way to estimate the monthly measurement sooner, so they could adjust their portfolios before the market reaction.

THE SOLUTION

i360 turned to Consumer Pulse to see whether faster and more accurate predictions of the Consumer Sentiment release could lead to better informed trading strategies. For more than two years, i360 has been measuring the public’s current and forward looking opinion on a variety of topics including the economy, society, product preference, employment, politics and COVID outlook through an ongoing, large scale, nationwide survey conducted daily. All of the responses collected by i360 are matched back at the PII (personal identifiable information) level to i360’s US Database of all 270MM adults. This means each respondent is identity-verified and matched to hundreds of data attributes including demographics, behavioral characteristics, and more stored in the i360 database which is updated daily from hundreds of sources. Because this database gives a real time look at the current US adult population, the survey responses are statistically weighted to be fully representative of the US population or any sub-population, at any given time, yielding an incredibly accurate view.

i360 has been tracking changes in consumer sentiment for over two years, providing unique and statistically valid insights into consumer trends and future opportunities. With knowledge of this product and dataset, the investment firm tasked i360 with recreating one of the two Consumer Sentiment Indexes and producing an estimate of the release ahead of the institution. i360 was up for the job and the in-house data science team got to work. The institution in question builds its prediction by conducting telephone interviews to sample the contiguous United States each month. With this knowledge, i360 asked more than 1,000 consumers a day, questions around life and the economy using the i360 Consumer Pulse survey and then applied an advanced predictive model on top of the results to most accurately predict the Consumer Sentiment Index, days before it was published.

THE RESULTS

So, did it work? First, i360 sought to understand whether their method was any more accurate than others at predicting the preliminary release of the Consumer Confidence Number. As shown in the graph below, i360 had the lowest error amongst a large group of top firms.