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Consumer sentiment and household expenditure: reevaluating the forecasting equations

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Abstract

This paper reestimates the simple forecasting regressions in Carroll, Fuhrer, and Wilcox (1993) (CFW), which investigate the predictive power of consumer sentiment for consumption growth. Durability in the consumption categories analyzed implies that the error term may be distributed as an MA(1), indicating that ordinary least squares (OLS) estimation is inappropriate when variables lagged one period are used in the forecasting equation. I reestimate the forecasting regressions using nonlinear least squares (NLLS), explicitly accounting for a moving average error structure. In addition, I include two financial indicators as controls in the forecasting regression. These changes produce notable qualitative differences with the results obtained in CFW, and with my own results using OLS. In particular, using NLLS and financial controls, consumer attitudes appear to have little incremental forecasting power for categories of consumption other than motor vehicles.

Suggested Citation

  • Sydney C. Ludvigson, 1996. "Consumer sentiment and household expenditure: reevaluating the forecasting equations," Research Paper 9636, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednrp:9636
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    References listed on IDEAS

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    1. Eric M. Leeper, 1992. "Consumer attitudes: king for a day," Economic Review, Federal Reserve Bank of Atlanta, issue Jul, pages 1-15.
    2. 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.
    3. Wilcox, David W, 1992. "The Construction of U.S. Consumption Data: Some Facts and Their Implications for Empirical Work," American Economic Review, American Economic Association, vol. 82(4), pages 922-941, September.
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    Cited by:

    1. Nicholas S. Souleles, 2001. "Consumer Sentiment: Its Rationality and Usefulness in Forecasting Expenditure - Evidence from the Michigan Micro Data," NBER Working Papers 8410, National Bureau of Economic Research, Inc.
    2. Jason Bram & Sydney C. Ludvigson, 1998. "Does consumer confidence forecast household expenditure? a sentiment index horse race," Economic Policy Review, Federal Reserve Bank of New York, vol. 4(Jun), pages 59-78.
    3. Nicholas S. Souleles, "undated". "Household Securities Purchases, Transactions Costs, and Hedging Motives," Rodney L. White Center for Financial Research Working Papers 24-99, Wharton School Rodney L. White Center for Financial Research.
    4. Brigitte Desroches & Marc-André Gosselin, 2002. "The Usefulness of Consumer Confidence Indexes in the United States," Staff Working Papers 02-22, Bank of Canada.

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