Consumer confidence and consumption forecast: a non-parametric approach

The consumer confidence index is a highly observed indicator among short-term analysts and news reporters and it is generally considered to convey some useful information about the short-term evolution of consumer expenditure. Notwithstanding this, its usefulness in forecasting aggregate consumption is sometimes questioned in empirical studies. Overall, the conclusions seem to be that the extensive press coverage about this indicator is somewhat undue. Nevertheless, from time to time, attention revamps on consumer confidence, especially when turns of the business cycle are expected and/or abrupt changes in this indicator occur. Some authors argue that in such events consumer confidence is a more relevant variable in predicting consumption. This fact can be a signal that a linear functional form is inadequate to explain the relationship between these two variables. Nevertheless, the choice of a suitable non-linear model is not straightforward. Here I propose that a non-parametric model can be a possible choice, in order to explore the usefulness of confidence in forecasting consumption, without making too restrictive assumptions about the functional form to use.