Consumer Confidence Surveys: Can They Help Us Forecast Consumer Spending in Real Time?
Croushore, Dean, Business Review (Federal Reserve Bank of Philadelphia)
The Federal Reserve Bank of Philadelphia's real-time data set for macroeconomists contains information on the data that a researcher or forecaster would have known at a date in the past. This data set, which is available on the Philadelphia Fed's website at www.philadelphiafed.org/ econ/forecast/reaindex.html, allows us to investigate a number of interesting economic and policy questions--one of which is the subject of this article. We will use the data set to investigate whether measures of consumer confidence help improve forecasts of consumer spending.
For many reasons, people want to know how the economy is doing. They would like to answer questions such as: Are we in an economic expansion? Will the economic expansion continue? Are interest rates likely to rise or fall? To find answers to these questions, people read the newspapers, which often report on the forecasts of professional economists. The government and private-sector firms also report on a variety of economic data, which may include such items as a survey of consumer confidence.
Several organizations take surveys of consumers to investigate what they say about the economy and their families' finances. The survey responses are compiled and used to form an index of consumer confidence, which is reported in the news media. The consumer-confidence measures are correlated with changes in consumer spending, so they appear to capture useful information about consumers' spending plans. But do they really help us forecast consumer spending in real time?
In theory, the indexes should enable us to predict what consumers will spend in the future, and a glance at the data tells us that the consumer-confidence measures are, indeed, strongly correlated with consumer spending. But we are interested in seeing whether the consumer-confidence measures pass a tougher test: Do they tell us more than we already know from other economic data? If we look at the existing research, we see that the consumer-confidence measures, though highly correlated with future spending, do not improve forecasts of future spending made on the basis of knowing consumers' incomes, past consumer spending, the interest rate, and the value of the stock market.
However, that previous research (which we will discuss in more detail later) is flawed in one important aspect. The data used in those studies were not available to forecasters in real time, that is, at the time their forecasts were made. Thoughtful researchers have long known that using such flawed data is not ideal, hut they did not have a data set such as the real time data set for macroeconomists until recently.
The failure to use real-time data may be important because data are revised. For example, the Bureau of Economic Analysis (BEA), the government agency that releases data on consumer spending, revises the data many years after the fact. For example, when the BEA revises the data on consumer spending and income, it uses data from tax returns and Social Security records that no forecaster could have known earlier. These data are much more accurate than the government's initial data on spending and income, which come from a very incomplete survey. If the revisions to the data on consumer spending and income are correlated with measures of consumer confidence, a forecaster in real time using measures of consumer confidence could make better forecasts than a forecaster who did not use measures of consumer confidence. So when previous researchers found that consumer-confidence indexes did not improve forecasts of consumer spending, they were not using the right data--no forecaster would have had the data they used. We will investigate the following question: If we used the data a forecaster would have had available in real time, would the measures of consumer confidence prove to be more valuable?
Fortunately, the Philadelphia Fed's real-time data set for macroeconomists allows us to undertake this exercise. …