Determinants of Consumer Sentiment Over Business Cycles: Evidence from the U.S. Surveys of Consumers

38 Pages Posted: 23 Jul 2016

See all articles by Kajal Lahiri

Kajal Lahiri

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

Yongchen Zhao

Towson University - Department of Economics

Date Written: July 22, 2016

Abstract

We study the information content of the University of Michigan’s Index of Consumer Sentiment as well as its five components. Using household data from the Surveys of Consumers, we identify the main determinants of these indicators and document their varying role over the business cycle. Our results suggest that while at the aggregate level, macroeconomic conditions explain sentiment well, important and additional information is contained at the level of households. We compare the role of objective and subjective information in determining household level sentiment, and show that significant heterogeneity in the absorption of news from local network sources is a major feature of consumer sentiment. The differential interpretation of current macroeconomic conditions is found to be more pervasive in periods of falling sentiment that typically predates business cycle peaks, and thus helps sentiment to foreshadow recessions.

Keywords: Consumer confidence, Cross-sectional heterogeneity, Asymmetry, News, Recessions

JEL Classification: E27, E27, C25, C55

Suggested Citation

Lahiri, Kajal and Zhao, Yongchen, Determinants of Consumer Sentiment Over Business Cycles: Evidence from the U.S. Surveys of Consumers (July 22, 2016). Available at SSRN: https://ssrn.com/abstract=2813251 or http://dx.doi.org/10.2139/ssrn.2813251

Kajal Lahiri

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

Yongchen Zhao (Contact Author)

Towson University - Department of Economics ( email )

Towson, MD 21204
United States

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