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5  Empirical Results

Table 5 presents the results of equation (2), where consumption growth is regressed against four lags of consumer confidence as explanatory variables. Lagged values of consumer confidence on its own explain between 12.8% and 24.4% of the variation in the quarterly growth rate of total private consumption expenditure. The coefficients of all the lagged consumer confidence measures are statistically significant at the 5% level. The estimated explanatory ability of New Zealand consumer confidence are higher than that found for the United States (14%, by Carroll et al (1994)) and Australia (4%, by Loundes and Scutella (2000) although this was not significant at the 10% level), but less than that for the United Kingdom (29.2%, by Acemoglu and Scott (1994)). Differences in time periods must be borne in mind with the cross-country comparisons.

A similar result was found for durables consumption, where consumer confidence accounted for between 10.6% and 25.3% of the variation in the quarterly growth rate. However, in the case of non-durables consumption, none of the confidence measures had any significant explanatory ability except for the Westpac Current Conditions Index. For services consumption, most of the lagged values of consumer confidence were significant in explaining a proportion of the variation in the quarterly growth rate.

The Westpac Current Conditions Index had the greatest explanatory ability for total private consumption, durables consumption and non-durables consumption, but is not significant in predicting services consumption. In general, the component questions of the Westpac survey on their own do not have as much predictive ability as the derived indexes. Similarly, the One News index has poorer predictive ability compared to the Westpac indexes. This is not surprising considering that the One News index is essentially a component question of the Westpac survey.

The finding that most of the consumer confidence indexes have no predictive ability in explaining variations in non-durables consumption growth is expected. Food and beverages make up over 60% of non-durables consumption, and demand for these products are generally income inelastic. Hence, consumer confidence would not have been expected to be a significant influence on non-durables consumption growth.

Table 6 reports the increment to the *. provided by the lagged values of consumer confidence, when four lags of the dependent variable and four lags of the log first difference in real labour income growth are added as control variables. These control variables are similar to the ones used by Carroll et al (1994). The results show that the One News index has no significant predictive ability once lags of the dependent variables and income are added. This lack of predictive ability is across all consumption measures. Similarly, most of the component questions of the Westpac survey do not significantly explain any additional variations to consumption growth once the control variables are introduced. The Westpac Current Conditions Index adds the most explanatory power for total private consumption, durables consumption and non-durables consumption growth. The Westpac survey Question 1 adds the most explanatory power for services consumption growth.

The additional predictive ability of consumer confidence is further eroded when financial indicators are introduced into the control variables. Table 7 reports the increment to the *. provided by the lagged values of consumer confidence, when the interest rate and stock market index are added to the control variables. These control variables are similar to the ones used by Bram and Ludvigson (1998). Of all the measures of consumer confidence, only the Westpac Overall Index and Current Conditions Index showed any additional explanatory power. Once again, the Westpac Current Conditions Index had the largest additional predictive ability, explaining an additional 23.4% of the variation in total private consumption growth.

Table 5 – Predictive ability of consumer confidence
  Westpac McDermott Miller Consumer Confidence Survey One News Colmar Brunton
  Overall Index Current Conditions Index Future Conditions Index Question 1 Question 2 Question 3 Question 4 Question 5
Total Private Consumption 0.226 0.244 0.189 0.177 0.167 0.165 0.166 0.128 0.135
(0.001) (0.000) (0.004) (0.005) (0.007) (0.008) (0.008) (0.023) (0.019)
Durables Consumption 0.203 0.253 0.165 0.223 0.126 0.148 0.135 0.106 0.164
(0.002) (0.000) (0.008) (0.001) (0.025) (0.013) (0.019) (0.042) (0.008)
Non-durables Consumption 0.043 0.118 -0.005 0.069 -0.031 -0.015 0.024 0.085 -0.009
(0.182) (0.031) (0.444) (0.103) (0.649) (0.517) (0.265) (0.070) (0.466)
Services Consumption 0.143 0.077 0.135 0.142 0.090 0.150 0.175 0.096 0.119
(0.015) (0.085) (0.019) (0.015) (0.062) (0.012) (0.006) (0.054) (0.029)

Note: The table reports the adjusted R2 statistics of equation (1), based on four lags of consumer confidence as explanatory variables. The numbers in parentheses are p-values of the joint significance of the lags. Figures in bold indicate significance at the 5% level. Sample period is 1990:2 to 2002:4.

Table 6 – Incremental predictive ability of consumer confidence
  Westpac McDermott Miller Consumer Confidence Survey One News Colmar Brunton
  Overall Index Current Conditions Index Future Conditions Index Question 1 Question 2 Question 3 Question 4 Question 5
Total Private Consumption 0.272 0.373 0.172 0.138 0.117 0.108 0.124 0.128 0.067
(0.001) (0.000) (0.015) (0.033) (0.052) (0.063) (0.045) (0.042) (0.141)
Durables Consumption 0.140 0.201 0.091 0.168 0.088 0.061 0.002 0.021 0.044
(0.026) (0.005) (0.081) (0.013) (0.086) (0.147) (0.395) (0.296) (0.200)
Non-durables Consumption 0.023 0.131 -0.030 0.019 -0.067 -0.040 -0.004 0.112 -0.021
(0.295) (0.044) (0.584) (0.312) (0.822) (0.645) (0.425) (0.065) (0.528)
Services Consumption 0.167 0.077 0.136 0.172 0.119 0.135 0.168 0.028 0.065
(0.012) (0.105) (0.028) (0.011) (0.042) (0.029) (0.012) (0.263) (0.134)

Note: The table reports the increment to the adjusted R2 statistic from adding four lags of consumer confidence to four lags of the dependent variable, and four lags of the log first difference in real labour income. The numbers in parentheses are the p-values for the joint significance of the lags of consumer confidence. Figures in bold indicate significance at the 5% level. Sample period is 1990:2 to 2002:4.

Table 7 – Incremental predictive ability of consumer confidence controlling for financial indicators
  Westpac McDermott Miller Consumer Confidence Survey One News Colmar Brunton
  Overall Index Current Conditions Index Future Conditions Index Question 1 Question 2 Question 3 Question 4 Question 5
Total Private Consumption 0.138 0.234 0.055 0.002 0.051 -0.004 0.037 0.005 -0.017
(0.048) (0.005) (0.198) (0.397) (0.210) (0.425) (0.255) (0.382) (0.492)
Durables Consumption 0.074 0.128 0.028 0.090 0.086 -0.008 -0.066 -0.074 -0.036
(0.162) (0.070) (0.294) (0.128) (0.136) (0.442) (0.735) (0.773) (0.580)
Non-durables Consumption 0.049 0.137 -0.005 0.020 -0.094 -0.016 0.016 0.091 -0.005
(0.243) (0.077) (0.426) (0.332) (0.826) (0.469) (0.345) (0.145) (0.424)
Services Consumption 0.054 0.050 0.000 0.101 0.043 0.026 -0.025 -0.063 0.018
(0.167) (0.181) (0.408) (0.065) (0.206) (0.276) (0.560) (0.819) (0.312)

Note: The table reports the increment to the adjusted R2 statistic from adding four lags of consumer confidence to four lags of the dependent variable, four lags of the log first difference in real labour income, four lags of the first difference in the real 90-day bank bill rate, and four lags of the first difference in the real stock price index. The numbers in parentheses are the p-values for the joint significance of the lags of consumer confidence. Figures in bold indicate significance at the 5% level. Sample period is 1990:2 to 2002:4.

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