Consumer Confidence Indices and Short‐term Forecasting of Consumption*

Abstract

There is growing interest in examining the short-term link between survey-based confidence indicators and real economic activity. This paper builds on previous studies to establish whether there is a short-term predictive relationship between measures of consumer confidence and actual consumption, in a range of major industrial countries. It then extends such previous analyses by assessing whether this relation has changed over time, and whether we can attribute any time-varying relation to structural developments in the economy, such as financial deepening and the increasing role of house prices in determination of consumption.

Would information on consumer confidence have helped to predict UK household expenditure during the recent economic crisis?

“…In conclusion, then, the empirical analysis that has been undertaken in the current paper suggests that developments in consumer sentiment do possess independent predictive content. As such, the recommendation of Al-Eyd et al (2009), that negligible attention be paid to movements in consumer sentiment in deciding upon monetary policy, would not be supported. Moreover, this study has shown that a modest refinement of the headline CCI can produce a general improvement in forecasting performance.…”

“…On the basis of the results that have been presented in the previous section of the , 2002-2007. In terms of the chosen form of confidence measure, the investigation which has been conducted in this paper is most closely related to the analyses of Cotsomitis and Kwan (2006), Al-Eyd et al (2009) and Jonsson and Linden (2009). Each of these earlier studies involved a consideration of data on several countries, one of which was the UK.…”

“…Models which have entered earlier empirical studies of the usefulness of an indicator of consumer sentiment for predicting the growth of household expenditure have tended to be quite similar in nature (e.g., Carroll et al (1994), Bram and Ludvigson (1998), Ludvigson (2004), Cotsomitis and Kwan (2006), Wilcox (2007), and Al-Eyd et al (2009)). More specifically, it is possible to regard their origins as lying within the Rational Expectations-Permanent Income Hypothesis (REPIH).…”

Consumer confidence and consumption forecast: a non-parametric approach

“…In addition, in a more recent contribution Ludvigson (2004) supports the view that there is relatively modest independent information coming from the consumer confidence index not already included in other variables. Also, according to Al-Eyd et al (2009) the relation between consumption and confidence would be unstable over time. The authors analyse European data and find very limited predictive content for the case of Italy, both in a relation between consumption and confidence, as well as considering other variables.…”

Forecasting Private Consumption by Consumer Surveys

“…As consumer confidence focuses on the willingness to pay, it can provide some information not embedded in other variables. Due to the liberalisation of financial markets, however, liquidity constraints have become less binding, leading to a decline in the impact of consumer confidence on consumption (see Al Eyd et al , ).…”