What it means
Economists want to know how people feel about the economy because their feelings influence spending. The Present Situation Index captures views on the here and now, based on survey questions about whether business conditions and the job market are good or bad at the moment.
The other part of the Consumer Confidence Index, the Expectations Index, covers views about the next six months. The index is expressed relative to a base year, with 1985 set at 100.
A reading above 100 means that sentiment about current conditions is stronger than in the base year, while a reading below 100 means weaker. What matters most is the direction and size of the change from month to month.
For businesses, the index offers an early read on likely consumer spending. A retailer or car dealer may watch it to decide on stock levels and promotions.
If the index falls sharply, many managers become more cautious about hiring and inventory, since shoppers are likely to hold back. The index is a snapshot of opinion, not a count of what people have bought, and it can be moved by news headlines, petrol prices or the stock market.
It does not always predict spending accurately. Analysts therefore combine it with hard data such as retail sales, employment and income figures.
Comparing the Present Situation Index with the Expectations Index is also revealing. If current conditions look weak while expectations are high, consumers may be hoping for a recovery.
If the present is strong but expectations slide, it can be a warning that a slowdown is anticipated. Treat the numbers with a degree of humility, as survey results are revised and subject to sampling error.
The Conference Board sets the exact method, so check its latest documentation before relying on detailed calculations. For managers, the main value is seeing the trend over several months.
In practice
Real-world examples.
Example
A furniture retailer sees the Present Situation Index fall for three months in a row. It delays a planned stock expansion and runs a financing promotion instead. The buying manager reviews the index again before the next quarterly order.
Example
A bank economist notes that the index has risen while retail sales are flat. She expects spending to improve in the coming months and revises her forecast upwards. She flags that the forecast depends on jobs data. The note to clients lists the indicators she will check next.
Example
A restaurant owner reads that sentiment about the job market has weakened. He postpones opening a second site and builds up cash. A year later, he uses the cash to buy equipment at a discount. His caution turned out to be useful when a supplier was forced to clear stock.
Formula
Calculation
Simplified illustration only: relative value = positive answers / (positive answers + negative answers); index = (current relative value / base-year relative value) x 100.
Suppose that in a survey of 1,000 households, 400 say current conditions are good and 600 say they are bad, so the relative value is 400 / (400 + 600) = 0.40. If the base-year relative value was 0.50, the index = (0.40 / 0.50) x 100 = 80. If next month 450 say good and 550 say bad, the relative value is 0.45 and the index = (0.45 / 0.50) x 100 = 90, a rise of 10 points.Case study
Seen in the real world.
Pinecrest Autos is a fictional car dealership group used for illustration. Its finance director tracked the Present Situation Index alongside monthly sales.
Over a four-month period the index fell by 25 points, mainly because of worry about jobs. Sales had not yet declined, but the director cut the next order for new vehicles by 15% and reduced advertising.
When sales did slow two months later, the illustrative group had less unsold inventory and lower interest costs. The index acted as an early warning rather than a precise forecast. The director added it to the monthly management pack, next to inventory levels and new orders.
Watch out
Common mistakes.
- Treating the index as a measure of actual spending. It records opinion, and spending can differ from sentiment.
- Reading too much into a single month. Survey results move around, so the trend is more reliable.
- Confusing it with the whole Consumer Confidence Index. The Present Situation Index is only one component, alongside the Expectations Index.
Questions
People also ask.
Who publishes the index?
The Conference Board, an independent research organisation, publishes it monthly as part of the Consumer Confidence Index.
What does a reading of 100 mean?
It means sentiment equals the 1985 base level used as the reference point.
Can I use it for businesses outside the United States?
It reflects US households, so use local confidence surveys for other countries. Many countries publish similar consumer sentiment measures, though the method differs.
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