Determinants of Consumer Sentiment Over Business Cycles: Evidence from the US Surveys of Consumers

Kajal Lahiri and Yongchen Zhao

Journal of Business Cycle Research, 2016, vol. 12, issue 2, No 3, 187-215

Abstract: 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 over 1979-2013, 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 (search for similar items in EconPapers)
JEL-codes: C25 C55 E27 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (23)

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DOI: 10.1007/s41549-016-0010-5

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