Consumer Sentiment and Economic Activity

The objective of this article is to reassess the validity of the consumer confidence (or sentiment) indices in anticipating the evolution of economic activity by considering a fairly high number of countries across the world (i.e.France, Germany, Italy, UK, USA, Japan, Canada and Australia) over a period of about thirty years, from the beginning of the seventies till the end of 2002 (quarterly data).To our knowledge this is the first attempt to analyse the consumer confidence index for several countries over such a long period of time.We model the CSIoutput relationship in a cointegrated vector autoregression (VAR) framework, by considering a common set of variables for all countries.Our findings suggest that: (a) what appears to be the main driving forces of consumer confidence cannot be simply summarised on the basis of the most common and used macroeconomic variables; (b) consumer confidence indices have some ability to forecast the evolution of economic activity, provided that both their coincident nature is taken into account and that a number of data-coherent parameter restrictions are imposed in the VAR specifications.These results appear to be fairly robust to several checks we have been able to perform given the availability of a large number of observations.In particular, the forecasting ability of consumer confidence indices is assessed with both in-sample and out-of-sample analyses.