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1  Introduction

This paper investigates the usefulness of consumer confidence in forecasting consumption expenditure in New Zealand. Consumer confidence surveys are widely followed and reported by financial analysts, policy-makers, and the media. These surveys are also sometimes used to forecast economic activity, in particular consumer spending.

Chopin and Darrat (2000) report that there is no consensus about the value of consumer confidence for forecasting consumer spending that is not already captured by economic fundamentals. If the changes in confidence precede changes in consumer behaviour, information on confidence could help explain consumer spending, and will be useful for forecasting purposes. But if confidence changes after or simultaneously with other movements in the economy, then measures of consumer confidence adds little to models designed to forecast the economy.

Recent overseas empirical work on the usefulness of consumer confidence in forecasting household spending showed mixed results. Carroll et al (1994) and Bram and Ludvigson (1998) provided empirical evidence showing that lagged values of consumer confidence contain predictive information about United States household spending, while Acemoglu and Scott (1994) found similar results for United Kingdom consumption growth. Berg and Bergstrom (1996) found that confidence has a significant effect on consumption in Sweden. Loundes and Scutella (2000) also found that consumer confidence is a useful indicator of consumption growth in Australia, particularly discretionary consumption, although it requires a much longer time frame for confidence to impact on consumption compared to other studies. Fan and Wong (1998), and Chopin and Darrat (2000) on the other hand, found no evidence of explanatory power in forecasting consumption growth using consumer confidence indexes in Hong Kong and the United States respectively.[1] Utaka (2003) found that in the case of Japan, consumer confidence has a short term effect on economic fluctuations, but not in the long term.

Using the two most widely followed measures of consumer confidence in New Zealand, lagged confidence on its own were found to have some predictive ability for forecasting consumption growth. However, this predictive ability was greatly reduced when control variables were introduced, suggesting that consumer confidence merely reflects current economic conditions. Because of this, consumer confidence provides little additional information above readily available economic and financial data for forecasting consumption.

This paper is structured as follows. Section 2 describes and compares the two measures of consumer confidence available in New Zealand. Standard determinants of consumer confidence are discussed in Section 3. In Section 4, the methodology, including data choice, is presented. In Section 5, the empirical results are discussed. Conclusions are contained in Section 6.

Notes

  • [1]Chopin and Darrat (2000) found that consumer confidence was an unreliable predictor for retail sales, but does contain valuable information for predicting some macroeconomic variables such as movements in personal disposable income, interest rates, and to some extent movements in the stock market index.
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