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Does Consumer Confidence Forecast Consumption Expenditure in New Zealand? - WP 03/22

3  Information Content of Consumer Confidence

Before moving on to examine the forecasting ability of consumer confidence, it is useful to evaluate the determinants of the confidence indexes itself. A common criticism of consumer confidence is that it is endogenous and merely a reflection of current macroeconomic conditions. Others argue however, that psychological factors that are not captured by economic variables can influence consumer decision-making, and confidence indexes are able to capture some of those effects. Figure 1 shows the two consumer confidence indexes. The shaded areas are technical recessions, defined as two consecutive quarters of negative growth in real gross domestic product (GDP). The graph shows that periods of recession do not necessarily correspond with falls in consumer confidence, and vice versa. In the September 2000 quarter, both consumer confidence indexes recorded large declines to levels last seen in the 1997/98 recession. However, no recession occurred.

Figure 1 – Consumer confidence indexes in New Zealand
Sources: One News Colmar Brunton, Westpac McDermott Miller, The Treasury

To test whether the consumer confidence indexes contain additional information over and above those contained in fundamental economic data, the following equation is specified:


where denotes the consumer confidence indexes, is a constant, is a vector containing standard economic variables that are thought to have an influence on consumers, and is the error term. The economic variables considered are: real labour income, unemployment rate (a proxy for precautionary savings), inflation (a proxy for uncertainty), real interest rates, real net housing wealth, real net financial wealth and lagged confidence.[4] Confidence is expected to be positively correlated with changes in income, housing and financial wealth, and negatively correlated with interest rates, inflation and changes in the unemployment rate. The more income or wealth a consumer has, the more positive they are likely to feel as reflected in the survey response. Conversely, the higher the unemployment rate, the more likely that consumers will worry about their own job prospects. Higher interest rates and inflation erodes consumers’ purchasing power due to less disposable income or higher prices.

Table 4 – Determinants of consumer confidence
One News Westpac
Initial Final Initial Final
Constant 61.679 53.171 55.819 55.479
(4.998)* (5.045)** (5.602)** (5.725)**
Current real interest rate -1.5000 -1.246 -1.361
(-1.453) (-2.14)* (-2.534)*
Current inflation rate 22.656 -15.748
-0.237 (-0.294)
Change in unemployment rate -17.763 -18.204 -5.766 -6.526
(-4.027)** (-4.654)** (-2.392)* (-2.883)**
Change in real labour income -163.296 126.888
(-0.893) -1.219
Change in real net housing wealth 165.225 168.754 125.679 137.978
(1.978)^ (2.14)* (2.711)** (3.133)**
Change in real net financial wealth 19.912 18.534
-0.258 -0.424
Lagged confidence 0.518 0.515 0.559 0.572
(5.316)** (5.426)** (6.843)** (7.271)**
Adjusted R-squared 0.74 0.75 0.82 0.82
DW d-stat 1.97 1.94 2.43 2.29
F-stat 22.16 52.08 34.06 60.76

Note: The sample period is 1990:1 to 2002:4. Normal t -values are reported in parentheses.
** Significant at the 1% level. * Significant at the 5% level. ^ Significant at the 10% level.

If consumer confidence is just a reflection of current economic conditions, then most of the variations in consumer confidence can be explained by the variables specified in equation (1). Table 4 presents the results of the initial and final specifications of equation (1). Due to data availability, the sample period is from 1990:1 to 2002:4, giving 52 observations. Multicollinearity among the independent variables was not found to be an issue. The initial specification regresses consumer confidence against all the variables considered above. The final specification regresses consumer confidence against only those variables that are found to be significant, using Hendry’s general to specific modelling approach. Due to a break in the headline inflation series from 2001:2 when interest rate effects were removed, an alternative inflation series excluding interest rates was also used (not reported). This did not make material differences to the regressions. As a further alternative test, the actual headline inflation series were replaced with consumers’ current inflation perception as well as inflation expectations in a year’s time.[5] This alternative is intended to examine whether it is expectations rather than actual inflation that has an influence on consumer confidence. No significant differences to the results were found, mainly due to the strong correlation between actual and expected inflation (not reported). As a consequence, the reported results in Table 4 uses the headline inflation series.

Based on the final specification, three-quarters of the variation in the One News index (=75.0%) can be explained by the change in the unemployment rate, change in real net housing wealth, and lagged confidence. Over four-fifths of the Westpac index (=82.4%) can be explained by current real interest rates, the change in the unemployment rate, change in real net housing wealth, and lagged confidence. Although the results suggest that confidence is highly correlated with the current state of the economy, some of the variations in the confidence indexes cannot be explained by fundamental economic data. The unexplained variations of these indexes may contain useful information for forecasting purposes.

Figure 2 – Actual, fitted and residual values from equation (1): final specification
One News
Actual, fitted and residual values from equation (1): final specification - One News
Actual, fitted and residual values from equation (1): final specification - Westpac


  • [4]The data used in this paper are described in more detail and plotted in the appendix.
  • [5]Consumers’ inflation expectations (both current perception and expectations in a year’s time) are surveyed by the Reserve Bank of New Zealand and Westpac McDermott Miller. Both the current perception and future expectations exhibit strong correlations with current actual inflation (between 0.87 to 0.90).
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