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Determinants of Consumer Sentiment over Business Cycles: Evidence from the U.S. Surveys of Consumers

Kajal Lahiri () and Yongchen Zhao ()

No 2016-14, Working Papers from Towson University, Department of Economics

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, 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: E27 E27 C25 C55 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mkt
Date: 2016-07, Revised 2016-07
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