Scary. Even if it's partially due to the MSM, it's still affects behavior.
Consumer Sentiment: Unfortunately, a Helpful Predictor
WSJ.COM
In ICS
As consumer confidence plumbs new debts, optimists sometimes argue that what consumers say isn?t a good indicator of how much they actually spend. For example, today the University of Michigan said its index of consumer sentiment (ICS) plunged sharply in June, while the Bureau of Economic Analysis reported a sharp increase in consumer spending in May, mostly thanks to rebate checks.
existing home sales
A new report from the Federal Reserve Bank of San Francisco does indeed find that consumer sentiment is a spotty indicator. Unfortunately, it is most accurate at times like the present: when the economy is weak and sentiment is falling.
The accuracy of the ICS in forecasting consumer spending ?seem[s] to align with periods of weakness or strength in the economy,? James Wilcox of the San Francisco Fed writes in a report. Mr. Wilcox studied consumer spending from 1960 to 2006 then tried to forecast it using a variety of variables, including the ICS and its components then excluding them. ?Forecasts including the ICS questions were more accurate when consumption growth was falling (as in the 2001 recession) or low (as in the sluggish recovery year of 2002) and when the economy was slowing (as in 2007). Forecasts excluding the ICS questions were more accurate when the economy and consumer spending were booming (as in 2005 and 2006). Thus, the forecasting contributions of consumer attitudes seem stronger when the economy is weaker, although, admittedly, the reasons for these results are not yet fully understood. Given the importance and difficulty of forecasting when the economy is weaker, that strength may appear just when it is most valuable to analysts and policymakers.? –Greg Ip |
