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What role does consumer sentiment play in the U.S. macroeconomy?

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Author Info

  • Jeffrey C. Fuhrer

Abstract

Many in the press and general public see consumer sentiment as a significant, independent force in the economy. Some suggest that sentiment indexes forecast future economic activity, others that changes in consumer sentiment actually drive business cycle fluctuations. ; This article shows that consumer sentiment plays a much more passive role, primarily reflecting rather than causing current economic conditions such as levels of income growth, inflation, unemployment, and interest rates. The author’s statistical tests show that most of the variation in consumer sentiment is explained by these broad macroeconomic variables. The information that is unique to sentiment plays a relatively small role in explaining subsequent variations in consumption expenditures. Similarly, contemporaneous consumer sentiment data have relatively little incremental value in forecasting current activity, beyond what is available in lagged macroeconomic data. Finally, sentiment’s independent role in fluctuations and forecasting has not increased in the 1990s, as some have suggested.

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Bibliographic Info

Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (1993)
Issue (Month): Jan ()
Pages: 32-44

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Handle: RePEc:fip:fedbne:y:1993:i:jan:p:32-44

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Keywords: Consumer behavior;

References

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  1. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  2. Jeffrey C. Fuhrer, 1992. "Do consumers behave as the life-cycle/permanent-income theory of consumption predicts?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 3-14.
  3. Burch, Susan W & Werneke, Diane, 1975. "The Stock of Consumer Durables, Inflation, and Personal Saving Decisions," The Review of Economics and Statistics, MIT Press, vol. 57(2), pages 141-54, May.
  4. Eric M. Leeper, 1992. "Consumer attitudes: king for a day," Economic Review, Federal Reserve Bank of Atlanta, issue Jul, pages 1-15.
  5. Batchelor, Roy & Dua, Pami, 1992. "Survey Expectations in the Time Series Consumption Function," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 598-606, November.
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Cited by:
  1. Choy, Keen Meng & Leong, Kenneth & Tay, Anthony S., 2006. "Non-fundamental expectations and economic fluctuations: Evidence from professional forecasts," Journal of Macroeconomics, Elsevier, vol. 28(2), pages 446-460, June.
  2. Jeffrey C. Fuhrer, 1993. "Commodity prices, the term structure of interest rates, and exchange rates: useful indicators for monetary policy?," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 18-32.
  3. Weder, Mark, 1998. "Fickle Consumers, Durable Goods, and Business Cycles," Journal of Economic Theory, Elsevier, vol. 81(1), pages 37-57, July.
  4. Marco Malgarini & Patrizia Margani, 2005. "Psychology, consumer sentiment and household expenditures: a disaggregated analysis," ISAE Working Papers 58, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
  5. Weder, Mark, 2004. "Near-rational expectations in animal spirits models of aggregate fluctuations," Economic Modelling, Elsevier, vol. 21(2), pages 249-265, March.
  6. Pami Dua, 2004. "Analysis of Consumers' Perceptions of Buying Conditions for Houses," Working papers 127, Centre for Development Economics, Delhi School of Economics.
  7. Vuchelen, Jef, 2004. "Consumer sentiment and macroeconomic forecasts," Journal of Economic Psychology, Elsevier, vol. 25(4), pages 493-506, August.
  8. Brigitte Desroches & Marc-André Gosselin, 2002. "The Usefulness of Consumer Confidence Indexes in the United States," Working Papers 02-22, Bank of Canada.
  9. Dudek, Sławomir, 2008. "Consumer Survey Data and short-term forecasting of households consumption expenditures in Poland," MPRA Paper 19818, University Library of Munich, Germany.
  10. Kajal Lahiri & George Monokroussos & Yongchen Zhao, 2012. "Forecasting Consumption in Real Time: The Role of Consumer Confidence Surveys," Discussion Papers 12-02, University at Albany, SUNY, Department of Economics.
  11. Parigi, Giuseppe & Schlitzer, Giuseppe, 1997. "Predicting consumption of Italian households by means of survey indicators," International Journal of Forecasting, Elsevier, vol. 13(2), pages 197-209, June.
  12. Panagiotis Konstantinou & Athanasios Tagkalakis, 2011. "Boosting Confidence: Is there a Role for Fiscal Policy?," Discussion Paper Series 2011_03, Department of Economics, University of Macedonia, revised Mar 2011.
  13. Ferreira García, María Eva & Rubio Irigoyen, Gonzalo & Martínez, María Isabel & Navarro, Eliseo, 2005. "Consumer Confidence and Yield Spreads in Europe," DFAEII Working Papers 2005-11, University of the Basque Country - Department of Foundations of Economic Analysis II.
  14. Nadenichek, Jon, 2007. "Consumer confidence and economic stagnation in Japan," Japan and the World Economy, Elsevier, vol. 19(3), pages 338-346, August.
  15. Antzoulatos, Angelos A., 1996. "Consumer credit and consumption forecasts," International Journal of Forecasting, Elsevier, vol. 12(4), pages 439-453, December.
  16. Roberto Golinelli & Giuseppe Parigi, 2003. "What is this thing called confidence? A comparative analysis of consumer confidence indices in eight major countries," Temi di discussione (Economic working papers) 484, Bank of Italy, Economic Research and International Relations Area.
  17. Batchelor, Roy & Dua, Pami, 1998. "Improving macro-economic forecasts: The role of consumer confidence," International Journal of Forecasting, Elsevier, vol. 14(1), pages 71-81, March.

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