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Does Consumer Confidence, As Measured By The Conference Board’s Index Of Consumer Confidence, 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. If so, it may also affect business spending on investment goods, as businesses adjust production in response to changes in consumer confidence that will affect demand. This paper examines effects on consumption and investment of changes in the conference Board’s Index of Consumer Confidence (ICC), and its subcomponent Index of Consumer Expectations (ICE). Using simple two variable regressions prior year values of ICS were found significantly related to current year consumption (but not vice versa). Using more sophisticated models, in which other variables that influence consumer demand are controlled for, the ICC, again lagged one period, was found also found systematically related to total consumer spending and spending on each of its parts: durable and nondurable goods, and services. Control variables included income, wealth, interest rates, consumer credit availability and exchange rates. No ICE relationship with any kind of consumer demand was found. With controls for other factors affecting investment, including the accelerator, depreciation allowances, interest rates, profits and stock market levels, the ICC was not found related to any type of investment. However but the 3 year average value of ICE (current and past two years) was found related to both inventory investment and housing investment. The magnitude of the impact of 2008 changes in ICC was found to be very large, capable of explaining the entirety of the estimated decline in GDP during 2009.

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Paper provided by Rensselaer Polytechnic Institute, Department of Economics in its series Rensselaer Working Papers in Economics with number 0904.

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Date of creation: Aug 2009
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Handle: RePEc:rpi:rpiwpe:0904

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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.
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