Does Consumer Confidence Predict Output Growth?

Tip of the hat to Ted Fertik for flagging Mian, Sufi and Khoshkhou (2017). The authors examine the role that partisan bias plays in consumer expectations. One of their findings is that consumer confidence is extraordinarily high among Trump supporters. But that this has not translated so far into higher spending.

I was skeptical of the notion that consumer confidence—as opposed to CEO confidence, investor confidence, and the risk appetite of intermediaries—had discernible and predictable effects on real economic activity. So I examined the data. Turns out that it does. And that it does so through a clear channel: Consumer confidence predicts discretionary consumer spending which in turn is a strong correlate of real GDP (RGDP) growth.

The evidence can be read off Figure 1. Read clockwise from top-left. (1) University of Michigan’s Index of Consumer Sentiment (MCSI) predicts RGDP growth even after controlling for lagged RGDP. (2) MCSI predicts growth in real discretionary consumer spending. (3) MCSI does not predict RGDP growth shocks orthogonal to discretionary consumer spending. That is, the residuals obtained by projecting change in log RGDP onto change in log consumer spending are not correlated with lagged consumer spending. (4) Discretionary consumer spending is contemporaneously correlated with growth in RGDP.


Figure 1. The empirical evidence for the confidence channel. The data is at the quarterly frequency and for the period 1960Q1-2017Q3. Source: Haver Analytics.