Business confidence is a well-known leading indicator of future output. Whether it has information about future investment is, however, unclear. We determine how informative business confidence is for investment growth independently of other variables using US business confidence survey data for 1955Q1-2016Q4. Our main findings are: (i) business confidence leads US business investment growth by one quarter, and structures investment by two quarters; (ii) business confidence has predictive ability for investment growth; (iii) remarkably, business confidence has superior forecasting power, relative to conventional predictors, for investment downturns over 1-3 quarter forecast horizons and for the sign of investment growth over a 2-quarter forecast horizon; and (iv) exogenous shifts in business confidence reflect short-lived non-fundamental factors, consistent with the 'animal spirits' view of investment. Our findings have implications for improving investment forecasts, developing new business cycle models, and studying the role of social and psychological factors determining investment growth.
Financial support of a SSHRC Insight Development Grant is gratefully acknowledged. Metaxoglou completed parts of this project while visiting CEEPR at MIT and he thanks the Center for their hospitality. We thank Patrick Higgins for providing us with an updated investment deflator series. We thank Nadav Ben Zeev, Garth Heutel, Lutz Killian, Aaron Smith, Jim Stock, and seminar participants at the Bank of Canada, for comments. The usual disclaimer applies. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
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