The quest for the best consumer confidence indicator
Out of 11 questions included in the EU harmonised consumer questionnaire, it is possible to construct 2 047 different consumer confidence indicators. We search through all these indicators in order to find the single indicator that has the highest correlation with private consumption growth. Moreover, we contrast this indicator to the current Consumer Confidence Indicator used by the European Commission, and some alternative indicators; also in terms of their predictive power of private consumption. The focus of the analysis is thereby on how to best exploit the information content of the current set of questions included in the harmonised consumer questionnaire, while other methodological aspects of the construction of the indicator is left aside. In this context, we test the hypothesis that an indicator based on questions related to the household, rather than the general economy, would prove informative. It seems reasonable to assume that respondents to the surveys have better knowledge of their own economic situation than they have of the general economic situation in their country. We find that this "micro" indicator, as well as an optimal indicator that takes into account the specifics of all EU member states, outperform the current Consumer Confidence Indicator. Both these indicators also perform better than an indicator based on the popular factor methodology.
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