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Does Consumer Confidence, As Measured By U. Of Michigan Indices, Affect Demand For Consumer And Investment Goods (Or Just Proxy For Things That Do)?

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  • John J. Heim

    ()
    (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)

Abstract

Declining consumer confidence is cited as a cause of declining consumer demand, independent of changes income, wealth, etc. If so, it may also affect demand for investment goods, as businesses adjust production to reflect changes in consumer confidence and its anticipated effect on demand. This paper examines the University of Michigan’s Index of Consumer Sentiment (ICS), and the Index of Consumer Expectations (ICE), a subcomponent of ICS also used in the Index of Leading Economic Indicators Index. Using simple two variable regressions ICS lagged one year explained considerable variance in current consumption (but not vice versa). Both the ICS and ICE lagged one year were found systematically related to consumer demand for nondurable goods, but not durable goods, services, or total consumer demand when an extensive list of other factors affecting demand such as income, wealth, interest rates, credit availability and the exchange rate were controlled for. Neither ICS nor ICE was found related to any component of investment.

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Paper provided by Rensselaer Polytechnic Institute, Department of Economics in its series Rensselaer Working Papers in Economics with number 0903.

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Date of creation: Aug 2009
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Handle: RePEc:rpi:rpiwpe:0903

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  1. John J. Heim, 2009. "Demand For Durable Goods, Nondurable Goods And Services," Rensselaer Working Papers in Economics 0906, Rensselaer Polytechnic Institute, Department of Economics.
  2. 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.
  3. Jorgenson, Dale W, 1971. "Econometric Studies of Investment Behavior: A Survey," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1111-47, December.
  4. John J. Heim, 2009. "Determinants Of Demand For Different Types Of Investment Goods," Rensselaer Working Papers in Economics 0902, Rensselaer Polytechnic Institute, Department of Economics.
  5. 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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