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What role does consumer sentiment play in the U.S. macroeconomy?

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  • Jeffrey C. Fuhrer

Abstract

Many in the press and general public see consumer sentiment as a significant, independent force in the economy. Some suggest that sentiment indexes forecast future economic activity, others that changes in consumer sentiment actually drive business cycle fluctuations. ; This article shows that consumer sentiment plays a much more passive role, primarily reflecting rather than causing current economic conditions such as levels of income growth, inflation, unemployment, and interest rates. The authors statistical tests show that most of the variation in consumer sentiment is explained by these broad macroeconomic variables. The information that is unique to sentiment plays a relatively small role in explaining subsequent variations in consumption expenditures. Similarly, contemporaneous consumer sentiment data have relatively little incremental value in forecasting current activity, beyond what is available in lagged macroeconomic data. Finally, sentiments independent role in fluctuations and forecasting has not increased in the 1990s, as some have suggested.

Suggested Citation

  • Jeffrey C. Fuhrer, 1993. "What role does consumer sentiment play in the U.S. macroeconomy?," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 32-44.
  • Handle: RePEc:fip:fedbne:y:1993:i:jan:p:32-44
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    File URL: http://www.bostonfed.org/economic/neer/neer1993/neer193b.pdf
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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.
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    3. Jeffrey C. Fuhrer, 1992. "Do consumers behave as the life-cycle/permanent-income theory of consumption predicts?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 3-14.
    4. Batchelor, Roy & Dua, Pami, 1992. "Survey Expectations in the Time Series Consumption Function," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 598-606, November.
    5. Burch, Susan W & Werneke, Diane, 1975. "The Stock of Consumer Durables, Inflation, and Personal Saving Decisions," The Review of Economics and Statistics, MIT Press, vol. 57(2), pages 141-154, May.
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