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Does Business Confidence Matter for Investment?

Hashmat Khan () and Santosh Upadhayaya ()
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Santosh Upadhayaya: Department of Economics, Carleton University

No 17-13, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: Business confidence is a well-known leading indicator of future output. Whether it has information about future investment is, however, unclear. We determine how informative business confidence is for investment growth independently of other variables using US business confidence survey data for 1955Q1–2016Q4. Our main findings are: (i) business confidence has predictive ability for investment growth; (ii) remarkably, business confidence has superior forecasting power, relative to conventional predictors, for investment downturns over 1–3 quarter forecast horizons and for the sign of investment growth over a2–quarter forecast horizon; and (iii) exogenous shifts in business confidence reflect short-lived non-fundamental factors, consistent with the ‘animal spirits’ view of investment. Our findings have implications for improving investment forecasts, developing new business cycle models, and studying the role of social and psychological factors determining investment growth.

Keywords: Business confidence; Investment; Forecasting; Downturns; Directional forecasts (search for similar items in EconPapers)
JEL-codes: C32 E22 E32 E37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for, nep-hme and nep-mac
Date: 2017-12-21, Revised 2019-03-20
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Published: Carleton Economic Papers

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