Forecasting Consumption: The Role of Consumer Confidence in Real Time with Many Predictors
Journal of Applied Econometrics, 2015
32 Pages Posted: 17 Jul 2015
Date Written: July 15, 2015
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: Suggested Citation