Does business confidence matter for investment?

Abstract

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.

Trust crisis in the financial sector and macroeconomic stability: a structural equation modelling approach

“…Such models can include several hundred and even thousands of variables and equations, often having interdependent variables. Thus, for analysing the business confidence predictive ability for investment growth, Khan and Upadhayaya (2019) have used structural dependencies and found that business confidence leads US business investment growth, and structures investment, as well as exogenous shifts in business confidence, reflect short-lived non-fundamental factors, consistent with the 'animal spirits' view of investment.…”

Related Research on News Sentiment Tendency and Stock Price Fluctuation

“…They used US business confidence survey data between 1955Q1-2016Q4 and found that Business Confidence has predictive power for investment growth. Compared to traditional forecasting indicators, Business Confidence has a stronger ability to predict investment downturns in the first three quarters and signs of investment growth in the second quarter [27].…”

Business Sentiment and International Business Travels: A Cross-country Analysis

“…The relationship between business confidence (or business sentiment) and economic variables has been analyzed in the literature (e.g., business confidence and stock prices [Darling 1955]; business confidence and investment [Khan and Upadhayaya 2019]; business confidence and economic activities [Taylor and McNabb 2007; de Mendonça and de Oliveira 2019]; business confidence and industrial production [Bruno, Crosilla, and Margani 2019]). However, very few studies have examined the link between business confidence and tourism-related variables.…”

“…Similarly, Milani (2017) find that more than 40% of historical US business cycle fluctuations are explained by business and consumer sentiment shocks. In terms of investment, Khan and Upadhayaya (2019) show that business confidence has predictive ability for investment growth in the United States between 1955 and 2016.…”

“…Second, our study contributes to the literature on the effect of business confidence on macroeconomic indicators. While Darling (1955), Khan and Upadhayaya (2019), Taylor and McNabb (2007), and others have examined the relationship between business confidence and several economic variables (e.g., gross domestic product [GDP], investment and stock prices), to the best of our knowledge, very few empirical studies (with the exception of Guizzardi and Stacchini 2015) have tested the association between business confidence and tourism-related variables across a large sample of countries with recent data. Guizzardi and Stacchini (2015) focus on the tourism supply side in the Rimini province of Italy and find that the sentiments of hotel keepers and managers can be an important predictor of tourism accommodation production.…”