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What do Sentiment Surveys Measure?

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Author Info

  • Ivan Roberts

    (Reserve Bank of Australia)

  • John Simon

    (Reserve Bank of Australia)

Abstract

Indices of business and consumer sentiment receive widespread media coverage and are closely watched by market economists despite their limited success as leading indicators. In this paper we ask what explains ‘sentiment’ and find that lagged economic indicators (such as changes in GDP, job vacancies and the cash rate) can explain a substantial proportion of the variation in a number of backward and forward-looking sentiment indices. This does not rule out the possibility that they may be useful for forecasting. We find, however, that when currently available economic information is appropriately ‘filtered’ from the sentiment indices, in most cases they fail even rudimentary Granger-causality tests of predictive ability. On a more positive note, we find that the Roy Morgan consumer confidence rating, NAB actual business conditions, NAB expected employment outlook over the next three months and the second question in the Roy Morgan and Westpac/MI consumer surveys all provide some, albeit small, contribution to forecasting employment growth. The second question of both consumer confidence surveys (which asks about anticipated personal financial conditions over the coming year) also appears to have some ability to predict recessions. Outside of these results there is little evidence that the surveys tell us anything we didn’t already know. Thus, there is reason to suspect that surveyed respondents’ forecasts offer little more information about the future path of the economy than a weighted average of lagged economic variables.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2001-09.

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Date of creation: Nov 2001
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Handle: RePEc:rba:rbardp:rdp2001-09

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Related research

Keywords: business; confidence; consumer; forecasting; predictive ability; sentiment; survey;

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References

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  1. 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.
  2. F. Thomas Juster & Paul Wachtel, 1974. "Anticipatory and Objective Models of Durable Goods Demand," NBER Chapters, in: Explorations in Economic Research, Volume 1, number 2, pages 136-188 National Bureau of Economic Research, Inc.
  3. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  4. Michael C. & Pao-Lin Tien, 2000. "Economic Discomfort and Consumer Sentiment," Eastern Economic Journal, Eastern Economic Association, vol. 26(1), pages 1-8, Winter.
  5. Joanne Loundes & Rosanna Scutella, 2000. "Consumer Sentiment and Australian Consumer Spending," Melbourne Institute Working Paper Series wp2000n21, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  6. Saul H. Hymans, 1970. "Consumer Durable Spending: Explanation and Prediction," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(2), pages 173-206.
  7. Arturo Estrella & Frederic S. Mishkin, 1996. "Predicting U.S. recessions: financial variables as leading indicators," Research Paper 9609, Federal Reserve Bank of New York.
  8. Arturo Estrella, 1997. "A new measure of fit for equations with dichotomous dependent variables," Research Paper 9716, Federal Reserve Bank of New York.
  9. Eric M. Leeper, 1992. "Consumer attitudes: king for a day," Economic Review, Federal Reserve Bank of Atlanta, issue Jul, pages 1-15.
  10. 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.
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Citations

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Cited by:
  1. Chris Aylmer & Troy Gill, 2003. "Business Surveys and Economic Activity," RBA Research Discussion Papers rdp2003-01, Reserve Bank of Australia.
  2. Aleksejs Melihovs & Svetlana Rusakova, 2005. "Short-Term Forecasting of Economic Development in Latvia Using Business and Consumer Survey Data," Working Papers 2005/04, Latvijas Banka.
  3. Dudek, Sławomir, 2008. "Consumer Survey Data and short-term forecasting of households consumption expenditures in Poland," MPRA Paper 19818, University Library of Munich, Germany.
  4. 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.

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