Does consumer sentiment forecast household spending? If so, why?

• Published in: The American economic review 1994-12, Vol.84 (5), p.1397-1408
• Main Authors: Carroll, Christopher D., Fuhrer, Jeffrey C., Wilcox, David W.
• Format: Article
• Language: English
• Subjects: comportamiento del consumidor; comportement du consommateur; consommation des menages; Consumer behavior; Consumer behaviour; Consumer confidence; Consumer economics; consumer expenditure; Consumer information; Consumer spending; consumo familiar; Correlation analysis; depense des consommateurs; Economic conditions; Economic forecasts; Economic growth models; Economic models; Expenditures; forecasting; gastos de consumo; household consumption; Household expenditure; Household income; matematicas; mathematics; mathematique; Modeling; Motor vehicles; P values; Perceptions; Personal consumption expenditure; Studies; technique de prevision; tecnicas de prediccion
• ISSN: 0002-8282; 1944-7981

In the 3 months following the Iraqi invasion of Kuwait, the University of Michigan's Index of Consumer Sentiment (ICS) fell an unprecedented 24.3 index points, to it slowest level since the 1981-1982 recession. The collapse in household confidence was cited as an important cause of the economic slowdown that ensued. Concern was fueled by the well-known contemporaneous correlation between the ICS and the growth of household spending. This correlation may simply reflect that, when economic prospects are poor, households curtail their spending and also give gloomy responses to interviewers. An analysis finds that lagged values of the ICS, taken on their own, explain about 14% of the variation in the growth of total real personal consumption expenditures over the post-1954 period. Further investigation shows that the ICS contributes about 3% to the R-bar squared of a simple reduced-form equation for total personal consumption expenditures in the longer of the 2 sample periods examined, but nothing in the shorter period.