Forecasting Consumption: The Role of Consumer Confidence in Real Time with Many Predictors

Journal of Applied Econometrics, 2015

32 Pages Posted: 17 Jul 2015

See all articles by Kajal Lahiri

Kajal Lahiri

State University of New York (SUNY) at Albany, College of Arts and Sciences, Economics

George Monokroussos

Joint Research Centre, Italy

Yongchen Zhao

Towson University - Department of Economics

Date Written: July 15, 2015

Abstract

We study the role of consumer confidence in forecasting real personal consumption expenditure, and contribute to the extant literature in three substantive ways: First, we reexamine existing empirical models of consumption and consumer confidence not only at the quarterly frequency, but using monthly data as well. Second, we employ real-time data in addition to commonly used revised vintages. Third, we investigate the role of consumer confidence in a rich information context. We produce forecasts of consumption expenditures with and without consumer confidence measures using a dynamic factor model and a large, real-time, jagged-edge data set. In a robust way, we establish the important role of confidence surveys in improving the accuracy of consumption forecasts, manifesting primarily through the services component. During the recession of 2007-09, sentiment is found to have a more pervasive effect on all components of aggregate consumption - durables, non-durables and services.

Keywords: Forecasting, Consumption, Consumer Sentiment, Factor Models, Kalman Filter, Real-Time Data, Fluctuation test

JEL Classification: C53, E21, E27

Suggested Citation

Lahiri, Kajal and Monokroussos, George and Zhao, Yongchen, Forecasting Consumption: The Role of Consumer Confidence in Real Time with Many Predictors (July 15, 2015). Journal of Applied Econometrics, 2015. Available at SSRN: https://ssrn.com/abstract=2631745

Kajal Lahiri (Contact Author)

State University of New York (SUNY) at Albany, College of Arts and Sciences, Economics ( email )

Department of Economics
1400 Washington Avenue
Albany, NY 12222
United States
518-442 4758 (Phone)
518-442 4736 (Fax)

HOME PAGE: http://www.albany.edu/~klahiri

George Monokroussos

Joint Research Centre, Italy ( email )

Via E. Fermi 1
I-21020 Ispra (VA)
Italy

Yongchen Zhao

Towson University - Department of Economics ( email )

Towson, MD 21204
United States

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