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Does Consumer Confidence Forecast Household Spending?

Author

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  • Dion, David Pascal
Abstract
The traditional consumption function based on the life cycle permanent income hypothesis (LC-PIH) considers that consumer spending is based on households’ expectations of their future income. However, in short-term forecasting, the traditional economic determinants of consumption do not perform accurately. In addition to these macroeconomic variables, a measure of uncertainty is needed to better assess the short-term dynamics of the consumption function. Such a measure of uncertainty may be given by households’ expectations about their personal financial situation and general economic situation. A measure of these expectations is provided by consumer confidence (measured by the Consumer Confidence Index - CCI). In addition, consumer confidence seems to contain both a forecasting and independent explicative ability to predict consumption. Economic variables do not fully explain confidence, suggesting that its independent explicative power stems from its idiosyncratic features. We discuss in detail these features thanks to a review of the theoretical and empirical literature by discussing the consistency of consumer confidence with the standard consumption theory, analysing the determinants of the CCI and studying the predictive and causal power of the CCI.

Suggested Citation

  • Dion, David Pascal, 2006. "Does Consumer Confidence Forecast Household Spending?," MPRA Paper 902, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:902
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    File URL: https://mpra.ub.uni-muenchen.de/902/1/MPRA_paper_902.pdf
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    Citations

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    Cited by:

    1. Hatice Gökçe Karasoy Can & Çağlar Yüncüler, 2018. "The Explanatory Power and the Forecast Performance of Consumer Confidence Indices for Private Consumption Growth in Turkey," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(9), pages 2136-2152, July.
    2. Orlando Gomes, 2010. "Consumer confidence, endogenous growth and endogenous cycles," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 37(4), pages 377-404, September.
    3. Mali Chivakul & Bernhard Kassner, 2019. "Can Consumption Growth in China Keep Up as Investment Slows?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 61(3), pages 381-412, September.
    4. Gomes, Orlando, 2007. "On the stability of endogenous growth models: an evaluation of the agents’ response to output fluctuations," MPRA Paper 2891, University Library of Munich, Germany.
    5. Ramalho, Esmeralda A. & Caleiro, António & Dionfsio, Andreia, 2011. "Explaining consumer confidence in Portugal," Journal of Economic Psychology, Elsevier, vol. 32(1), pages 25-32, February.
    6. Dion, David Pascal, 2006. "Does Consumer Confidence Forecast Household Spending? The Euro Area Case," MPRA Paper 911, University Library of Munich, Germany.

    More about this item

    Keywords

    Consumer confidence; consumption function; forecasting;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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