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Does consumer sentiment predict regional consumption?

  • Thomas A. Garrett
  • Rubén Hernández-Murillo
  • Michael T. Owyang

This paper tests the ability of consumer sentiment to predict retail spending at the state level. The results here suggest that, although there is a significant relationship between sentiment measures and retail sales growth in several states, consumer sentiment exhibits only modest predictive power for future changes of retail spending. Measures of consumer sentiment, however, contain additional explanatory power aside from the information available in other indicators. We also find that by restricting our attention to fluctuations in retail sales that occur at the business cycle frequency we can uncover a significant relationship between consumer sentiment and retail sales growth in many additional states. In light of these results, we conclude that the practical value of sentiment indices to forecast consumer spending at the state level is, at best, limited.

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File URL: http://research.stlouisfed.org/wp/2003/2003-003.pdf
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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2003-003.

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Date of creation: 2004
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Publication status: Published in Federal Reserve Bank of St. Louis Review, March/April 2005, 87(2, Part 1), pp. 123-35
Handle: RePEc:fip:fedlwp:2003-003
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  1. 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.
  2. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
  3. John G. Matsusaka & Argia M. Sbordone, 1993. "Consumer confidence and economic fluctuations," Working Paper Series, Macroeconomic Issues 93-13, Federal Reserve Bank of Chicago.
  4. E. Philip Howrey, 2001. "The Predictive Power of the Index of Consumer Sentiment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 175-216.
  5. Batchelor, Roy & Dua, Pami, 1998. "Improving macro-economic forecasts: The role of consumer confidence," International Journal of Forecasting, Elsevier, vol. 14(1), pages 71-81, March.
  6. 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.
  7. Allenby, Greg M & Jen, Lichung & Leone, Robert P, 1996. "Economic Trends and Being Trendy: The Influence of Consumer Confidence on Retail Fashion Sales," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 103-11, January.
  8. 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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