Does Consumer Confidence, As Measured By U. Of Michigan Indices, Affect Demand For Consumer And Investment Goods (Or Just Proxy For Things That Do)?

Abstract

Declining consumer confidence is cited as a cause of declining consumer demand, independent of changes income, wealth, etc. If so, it may also affect demand for investment goods, as businesses adjust production to reflect changes in consumer confidence and its anticipated effect on demand. This paper examines the University of Michigan’s Index of Consumer Sentiment (ICS), and the Index of Consumer Expectations (ICE), a subcomponent of ICS also used in the Index of Leading Economic Indicators Index. Using simple two variable regressions ICS lagged one year explained considerable variance in current consumption (but not vice versa). Both the ICS and ICE lagged one year were found systematically related to consumer demand for nondurable goods, but not durable goods, services, or total consumer demand when an extensive list of other factors affecting demand such as income, wealth, interest rates, credit availability and the exchange rate were controlled for. Neither ICS nor ICE was found related to any component of investment.