Consumers’ Expectations and Consumption Expenditure

Abstract

Some studies have examined the impact of consumers’ expectations on consumption expenditure. However, none of these studies concludes a clear positive relationship between these variables. It has been argued that consumers’ expectations about the economy’s future should have an impact on consumers’ decisions about how much to consume and how much to save. While consumers’ expectations seem to be a strong predictor for future consumption expenditure, there are potential statistical problems with the use of current available estimates of consumers’ expectations. In this paper, we hypothesize that, due to these statistical problems, consumers’ expectations measured by currently available estimates such as the index of consumer sentiment do not have explanatory power to predict future levels of consumption expenditure. We present empirical evidence that, while disposable income is a good predictor for consumption expenditure, the index of consumer sentiment is not a reliable predictor for future levels of consumption. Our empirical analysis is based on a multiple regression model in which the dependent variable is consumption expenditure and the independent variables include disposable income and consumers’ sentiment. Data for consumption expenditure and disposable income are obtained from the Bureau of Economic Analysis: National Economic Accounts at WWW.bea.doc.gov, and the data for consumers’ sentiment index were obtained from WWW.econstats.com. We use monthly time series data for all three variables over the 1990-2003 period.