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The quest for the best consumer confidence indicator

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  • Andreas Jonsson
  • Staffan Lindén
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    Abstract

    We search through all possible consumer confidence indicators in order to find the single indicator that has the highest correlation with private consumption growth. Moreover, we contrast this indicator to the Consumer Confidence Indicator used by the European Commission, and some alternative indicators; also in terms of their predictive power of private consumption. In this context, we test the hypothesis that an indicator based on questions related to the household, rather than the general economy, would prove informative. We find that this "micro" indicator, as well as an optimal indicator that takes into account the specifics of all EU member states, outperform the current Consumer Confidence Indicator. Both these indicators also perform better than an indicator based on the popular factor methodology.

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    File URL: http://ec.europa.eu/economy_finance/publications/publication14353_en.pdf
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    Bibliographic Info

    Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 372.

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    Length: 35 pages
    Date of creation: Mar 2009
    Date of revision:
    Handle: RePEc:euf:ecopap:0372

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    Related research

    Keywords: The quest for the best consumer confidence indicator; consumer confidence; private consumption; predictive power; Jonsson; Lindén;

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    1. Carroll, Christopher D & Fuhrer, Jeffrey C & Wilcox, David W, 1994. "Does Consumer Sentiment Forecast Household Spending? If So, Why?," American Economic Review, American Economic Association, vol. 84(5), pages 1397-1408, December.
    2. Jeff Dominitz & Charles F. Manski, 2004. "How Should We Measure Consumer Confidence?," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 51-66, Spring.
    3. John Y. Campbell & N. Gregory Mankiw, 1990. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
    4. Jason Bram & Sydney Ludvigson, 1997. "Does consumer confidence forecast household expenditure?: A sentiment index horse race," Research Paper 9708, Federal Reserve Bank of New York.
    5. Easaw, Joshy Z. & Garratt, Dean & Heravi, Saeed M., 2005. "Does consumer sentiment accurately forecast UK household consumption? Are there any comparisons to be made with the US?," Journal of Macroeconomics, Elsevier, vol. 27(3), pages 517-532, September.
    6. Sydney C. Ludvigson, 2004. "Consumer Confidence and Consumer Spending," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 29-50, Spring.
    7. G. Goldrian & J.D. Lindbauer & G. Nerb & B. Ulrich, 2001. "Evaluation and development of confidence indicators based on harmonised business and consumer surveys (Study contracted to IFO, Munich)," European Economy - Economic Papers 151, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
    8. E. Philip Howrey, 2001. "The Predictive Power of the Index of Consumer Sentiment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 175-216.
    9. Madsen, Jakob B. & Mcaleer, Michael, 2000. "Direct Tests of the Permanent Income Hypothesis under Uncertainty, Inflationary Expectations and Liquidity Constraints," Journal of Macroeconomics, Elsevier, vol. 22(2), pages 229-252, April.
    10. repec:fth:harver:1435 is not listed on IDEAS
    11. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
    12. Christian Gayer, 2007. "A fresh look at business cycle synchronisation in the euro area," European Economy - Economic Papers 287, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
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    Cited by:
    1. Roland Döhrn & Tobias Kitlinski & Martin Micheli & Torsten Schmidt & Simeon Vosen & György Barabas & Heinz Gebhardt & Lina Zimmermann, 2010. "Die wirtschaftliche Entwicklung im Inland zur Jahresmitte 2010 - Aufschwung verliert an Fahrt," RWI Konjunkturbericht, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, pages 46, 09.

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