WASHINGTON - Layoffs, plunging home prices and tumbling investments have pushed consumer pessimism to record levels in October, the Conference Board, a private research group, said Tuesday.
The consumer confidence index fell to 38, the lowest level since the Conference Board began tracking consumer sentiment in 1967. That's down from a revised 61.4 in September and significantly below analysts' expectations of 52.
Here's a look at how the index is compiled and, more important, what its findings reflect:
How are the monthly surveys conducted?
On the first day of each month, 5,000 U.S. households are sent questionnaires by mail. A different group representing a demographic cross-section of the nation is surveyed each month. About half the households surveyed typically send back responses.
What are survey participants asked?
Five questions. The first two ask the respondent's views of current business conditions, and expectations of what those conditions will be in six months. The third and fourth questions are about the current job market and expectations for six months down the road. The final question asks about family income expectations in six months.
How do they come up with an index number based on the responses?
Responses are categorized as positive, negative or neutral. For each question, the number of positive responses is divided by the sum of positive and negative responses. The index is the average of the numbers for the survey's five questions.
Lots of research companies and private groups conduct surveys that measure consumer thinking and behavior. Why is the Conference Board's survey so closely watched compared with the others?
The board's survey has asked the same five questions since it began in 1967. That consistency and long track record make the board's index highly regarded, along withthe large sample size of 5,000 households.
Why do these findings matter?
Consumer spending accounts for two-thirds of gross domestic product - a measure of the value of all goods and services produced within the U.S. Economists often reason that consumers who are pessimistic about their prospects are less likely to spend.
To match consumer demand, companies must reduce output, which means they'll probably stop growing - and consequently might have to lay off workers, or at least stop hiring new ones.
Retailers and credit card providers are two examples of companies that closely watch consumer confidence. But even companies that don't directly deal with consumers - say, a supplier of data storage to big businesses - can be affected, because consumer spending helps dictate how much businesses spend. If consumer confidence falls month after month, a recession is usually around the corner, if it isn't there already.