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6  Conclusions

This paper examined the ability of consumer confidence to forecast consumption expenditure in New Zealand. The headline measures of consumer confidence from the One News Colmar Brunton Poll and Westpac McDermott Miller Consumer Confidence Survey were used. Two further indexes were also derived from the Westpac survey based on the individual component questions. Although a large proportion of the variation (between 75% to 82%) in the headline consumer confidence measures can be explained by fundamental economic data, there is enough unexplained variations to suggest that confidence may contain useful information for forecasting purposes. The Westpac survey appears to better reflect current economic conditions compared to the One News survey.

On their own, lagged values of all the headline and derived consumer confidence indexes, as well as all the individual component questions of the Westpac survey were found to have some explanatory power for the quarterly growth rates of total private consumption and durables consumption. The explanatory ability of New Zealand consumer confidence was higher compared to the United States and Australia, but less compared to the United Kingdom.

When control variables were introduced all the confidence measures, with the exception of the headline index and Current Conditions Index from the Westpac survey, were found to contain no additional predictive ability. The Current Conditions Index had the largest additional predictive ability for total consumption after introducing control variables, explaining an additional 23.4% of the quarterly growth rates. Confidence was not found to contain additional predictive ability for durables, non-durables or services consumption.

This finding suggests that consumer confidence merely contains a lot of the economic information that influences consumption expenditure, and therefore adds very little additional information for forecasting purposes. Although confidence appears to have additional predictive ability for total consumption, this result should be treated with caution as confidence had no predictive ability for the components of consumption. However, this is not to say that no attention should be paid to consumer confidence. Because confidence indexes are available in a timely manner compared to economic data, they provide useful summary information for making assessments of current economic conditions.

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