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BPEA Article

The Predictive Power of the Index of Consumer Sentiment

Abstract

THE MONTHLY RELEASE of the Index of Consumer Sentiment (ICS) by the
Survey Research Center of the University of Michigan is featured in the
financial press with much fanfare, especially during periods of economic
uncertainty. Yet the conventional wisdom appears to be that although the
index by itself has considerable predictive power, when used in conjunction
with other readily available economic variables its marginal value is
quite small. For example, Christopher Carroll, Jeffrey Fuhrer, and David
Wilcox conclude that “consumer sentiment does indeed forecast future
changes in household spending. . . . Further, sentiment likely has some
(though probably not a great deal) of incremental predictive power relative
to at least some other indicators for the growth of spending.”1 On the other
hand, John Matsusaka and Argia Sbordone find evidence of a qualitatively
significant causal relationship between the ICS and GDP: they estimate
that between 13 and 26 percent of variations in GDP can be attributed
to variations in consumer sentiment.

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