Consumer sentiment: What it is and how to measure it correctly

Consumer sentiment aims to answer pretty much the same question, albeit in a more rigorous and comparatively nerdy way, by determining how consumers are thinking and feeling about economic conditions as well as their own financial situation and outlook. Individual companies can also conduct consumer sentiment surveys to assess how their customers feel about their brand, products and services, and customer relations.

Evaluating consumer sentiment is one of the cornerstone components of sound market research. By effectively gauging consumer attitudes, behaviors and beliefs, a business can craft messages, reach its target audience, and take actions to strengthen customers' affinity, loyalty, and perceptions of your company in ways that can drive stronger business results.

Consumer sentiment affects much more than point of sale transactions. Shifts in consumer sentiment typically ripple through every level of the broader supply chain. Manufacturers, retailers, distributors, marketers, and more can all benefit from gaining deeper insights into their consumers and adjusting their strategies in response. Awareness and analysis of ongoing consumer sentiment indexes blended with surveys of consumers and other ways of gathering feedback can give your organization an edge through better understanding your customers.

Consumer sentiment—often used interchangeably with consumer confidence— assesses how consumers as a collective whole are feeling about the economy at a certain point and time, as well as their outlook for the future. Consumer sentiment can be measured in a range of ways. At the macro level, consumer sentiment is one of several key economic indicators that go into an ongoing assessment of the state of the economy in the United States.  

At the micro level, industry organizations or individual companies use consumer sentiment surveys to get a snapshot of how their target markets or audiences are thinking and feeling about the overall economy and business conditions, as well as their views on specific trends, products and services. By analyzing both the overarching consumer sentiment with more targeted market research on how customers and prospects are feeling, companies are better equipped to adapt to current conditions as well as make any necessary course corrections based on how consumer sentiment is trending at any given time.

Through these series of questions, the Consumer Sentiment Index aims to add clarity and context to three key insights from respondents:

Obviously, when consumer sentiment measures are moving in a positive direction, it’s a clear indicator that the economy is doing well and most consumers anticipate that economic conditions will remain strong. Conversely, downward trends in consumer sentiment indicate that consumers are feeling uneasy about economic conditions and are pessimistic about those trends reversing any time soon.

These high-level sentiments play out in real life in terms of consumer activities and behavior. When people or business owners are optimistic about their own finances and prospects they tend to spend more freely, and are more open to purchasing non-essential items or making significant capital investments. Yet when things turn gloomy, many consumers and businesses tend to freeze up—out of necessity or fear— and spending declines.

Armed with the macro insights generated by these prominent indexes as well as industry-specific indexes and analysis, individual companies can then dig deeper into how their specific target audiences are feeling about their specific financial position, as well as their views of economic conditions at an industry and national level.

Gathering this more targeted information is critical, as sentiments in and toward individual industries and sectors may not be fully aligned with the broader national sentiment. Many examples of this emerged during the COVID-19 pandemic. While overall consumer confidence plummeted, specific industries experienced record-breaking sales.

For instance, early on in the pandemic many companies selling household paper products couldn’t keep up with the great toilet paper rush of 2020. Over time, pandemic friendly activities such as those associated with the outdoors, also boomed.

RVs sold at a pace unseen in two decades, kayaks and bikes went on backorder, and sales of tennis racquets jumped by more than 40%  year over year. In contrast, the tennis industry offers a key example why industry associations and companies should pay close attention to consumer sentiment. Many resorts and tennis clubs are undergoing or planning expansions to meet the rising demand for court time. Yet, if targeted consumer sentiment research starts indicating that the tennis boom ends up being a pandemic-driven blip, those investments could end up being costly mistakes.

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As suggested, consumer sentiment— often gauged using consumer surveys—is one of the most revealing economic indicators. Consumers are the basis of the developed economy and, in response, their attitudes and beliefs can tell you a lot about where they are at – and how your company might respond.

Consumer confidence is used to evaluate two—often strongly correlated—things: how consumers feel about the economy as a whole and how consumers feel about their personal economic situation. Consumer confidence is typically considered a lagging indicator because the real state of the economy will experience fundamental changes before individuals begin changing their actual spending and consuming behavior.

When consumers are not confident in the state of the economy, they will be much less likely to spend and consume. As the economy begins to expand, consumers typically will become more liberal with their spending, both because they likely have more money and because they are less worried about economic challenges.

Interestingly, researchers have found that often consumers will tend to project their personal financial situation onto the broader economy as a whole. Lost your job recently? You’re likely to have a more negative view of the economy, even in good economic times. However, the large sample size and carefully crafted questions associated with major consumer confidence indexes effectively account for this source of bias.

Anyone involved in the business of selling something knows there’s complexities involved in how, when and why people spend their money.

Consumer spending is strongly tied to the overall economy as well as how individuals feel about that economy. A consumer’s willingness to spend doesn’t simply rely on how much money they have in the bank or are currently earning, but also, how much money they believe they will likely have in the future. When consumers believe that their future financial situation will worsen – either due to personal issues or broader economic trends, they will be much less likely to make any serious financial commitments, even for things they could “afford” on paper.

Consumer sentiment and consumer spending often initiate a positive feedback cycle. In other words, as consumer sentiment begins to improve, consumer spending will usually increase in response. At the same time, widespread increases in consumer spending will typically indicate that the average person now is accessing a greater “basket of goods”, which, in turn, can cause consumers to have a more optimistic view of the broader economy. 

Consumer attitudes have a strong connection to general consumer sentiment. A consumer’s attitude will intimately affect not only how much they are willing to spend (consumer spending), but it will also affect what they are willing to spend their money on. During the COVID-19 outbreak, for example, consumer spending generally dropped, but many products that are traditionally associated with negative consumer attitudes, such as alcohol, saw an uptick in sales.

While a shift in consumer attitudes doesn’t necessarily translate to a change in consumer behavior, examining attitudes can provide key insight. Knowing whether the consumer has an optimistic or pessimistic future can be very useful, but taking a closer look and diving deeper can help them learn even more. For example, if a consumer has a pessimistic outlook for the next six months but believes things will improve within the next year—an outlook that is not uncommon in the middle of a pandemic—the consumer might still be willing to spend heavily on long-term investments, such as a mortgage for a home. If they believe that the economy is doing poorly and will continue to do poorly into the foreseeable future, on the other hand, they’ll be much less likely to make these long-term commitments.

Consumer sentiment, overall, is useful because very few consumers exist or make choices in a vacuum. Positive feedback cycles are ubiquitous in our economy, both for optimistic and pessimistic behaviors. When other consumers pull their money from a bank, for example, others might panic and decide to do the same (which is why we have the FDIC insuring our funds). When other consumers decide that a given year, for whatever reason, is the optimal time to make a major investment, other participants in the economy will also likely decide to spend heavily. By understanding how a consumer’s worldview both shapes and is shaped by events—both real and imagined—in the consumer economy, it becomes possible to predict future behaviors and adjust your organization’s activity accordingly.

Consumers inevitably affect every portion of the supply chain. Consumers create demand for products and services and, ultimately, changes in consumer demands will influence whether a given product is made, processed, and delivered. Because of this, paying attention to consumer sentiment can be beneficial for market participants across and within every industry, even if a particular firm is not necessarily associated with consumer behavior.

Manufacturing is a sector that needs to keep a steady eye on consumer sentiment, particularly in the fast-changing COVID-19 environment.  For instance, with the COVID-19 pandemic retreating in the US, demand is surging for many products and  largely due to pent-up consumer demand, and more money in wallets due to stimulus checks. Yet manufacturers, who have dealt with a steady stream of supply chain disruptions need to be cautious about large-scale production escalation.

Ongoing analysis of U.S. consumer sentiment, as well as industry specific buyer sentiment, will be critical to help individual manufacturers gauge whether making major investments in ramping up production and inventory is wise, or if the demand represents a short-term bubble that will deflate and return business activities back to pre-pandemic levels. These trends could vary industry to industry. For instance, if the economy heats up, demand for luxury items might continue to soar. But if headwinds start blowing, consumer staples might see growth while luxury items falter.

One example of a sector-specific report is the Philadelphia Fed’s Manufacturing Business Outlook Survey, which tracks the manufacturing sector. Other reports of similar nature include U.S. Chicago PMI, Manufacturing, Services and Composite PMIs.

For your company, conducting audience panels are key for this as they can reveal unique needs and characteristics that could tip the scales in either direction depending on the products being manufactured and what demand might be for them beyond the short term.

Retailers look at consumer sentiment in an effort to maximize profits and inform strategies and activities. When consumer attitudes change quickly, as was seen in early 2020, the products consumers demand will also change – Case in point: The great toilet paper rush of spring 2020.

A consumer’s view of both their personal financial situation and the national economic situation will directly affect the things they want to buy. Retailers look at consumer sentiment and related data to adjust their inventory, their placement strategies, and marketing messaging.

Retailers that consistently track consumer sentiment indexes and conduct their own consumer sentiment research are in a position to react more quickly to shifts, and get a clearer sense of what the future might hold.

Consumer sentiment also impacts the flow of cash into and out of financial institutions. When demand for new loans is high—which typically coincides with an optimistic consumer outlook—banks can be in a position to raise interest rates and/or invest more in marketing and sales to juice loan volume. When the outlook turns pessimistic, banks will often lower interest rates in an attempt to gain more market share or encourage existing customers to take advantage of the low-rate environment. The latter scenario played out across 2020. Despite a negative overall consumer outlook, historically low mortgage rates led to consumers continuing to refinance and, as the year progressed, look to buy a new home.

Consumer sentiment can affect interest rates and volumes of loans for pretty much any product that requires an individual or business to seek financing. In addition to mortgages, sentiments can influence small business loans, auto loan lending, and financing for smaller purchases, such as appliances and new technologies. In the financial sector, institutions will always try to maximize cash flow while minimizing risk. Tracking consumer sentiment is a key factor in finding balance in that equation.

Ultimately, the usefulness of consumer sentiment surveys can be seen in pretty much every level of the supply chain. The many moving pieces of our economy are not independent, but rather, they are deeply reliant on one another and work as a collective organism. Understanding consumer sentiment in the status quo can help your business make short-term adjustments and long-term forecasts. As long as your business is directly affected by the economy’s broader movements—something that is true for essentially every business—then monitoring consumer sentiment will be important.

While it may seem counterintuitive there is not a straight line correlation between consumer sentiment and consumer demand, which gets underscored in the differences between surveys aimed to capture each.

While consumer sentiment surveys attempt to understand how consumers feel about the economy and their personal financial situations, consumer demand surveys focus more on anticipated buying activities and trends to help forecast the expected future demand for a given product or service.

Certainly, consumer demand and consumer sentiment—as explained above—are closely linked. But it is important to recognize that each can play a unique role in helping to guide business decisions.  For instance, some goods and services will be much more strongly affected by shifts in consumer sentiment than others. For example, if overarching consumer sentiment is generally positive, if certain sectors of the economy are seeing a spike in unemployment then a considerable swath of the buying public will be less likely to make non-essential purchases, but they’ll still need paper towels and laundry detergent. This is an example in which companies in specific sectors will benefit from consumer demand surveys, to get a clearer view into how their products and services may be impacted by the current and anticipated environment.

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The established consumer sentiment indexes, such as the Consumer Confidence Index (CCI) and the Michigan Consumer Sentiment Index (MCSI) provide individual companies with vital information. Yet, these indexes will provide your company with only part of the full picture when it comes to your customers and prospects. By conducting your own consumer sentiment surveys you can craft targeted questions that help complete the picture and provide you with data-driven insights to adapt your strategy and tactics to meet your customers where they are – and where they think they are going.

The  SurveyMonkey Audience panel and other key survey and research tools, businesses can gain insights into how their target audience is thinking and feeling about the economy in general, and more specifically the products and services your company is selling. Asking questions about future outlook, consumption habits, spending habits, and more can help provide significant guidance into anticipated demand or the need to adapt. The audience panel, with more than 50 million people around the world ready to take a survey, is large enough for even very niche firms to gain statistically significant insights.

These surveys can be used to help anticipate inventory and staffing needs as well as justifying investments or operational decisions to investors, lenders, and other key stakeholders. In an era driven by data, it is crucial to have access to the large swaths of data and insight that consumer sentiment surveys can provide.

Knowing how consumers—and your customers— think and feel about the state of the economy, your industry, and more directly, your brand, products, and services can play a major role in guiding all aspects of your business. From tangible issues such as production and inventory levels, to more nuanced issues such as brand perception and evolving attitudes toward your industry and products.Get started by exploring the many benefits of  SurveyMonkey Audience and sharpen your research knowledge with our How to do market research: the ultimate guide.