Does Consumer Sentiment Predict Regional Consumption?

Abstract

This paper tests the ability of consumer sentiment to predict retail spending at the state level.The results here suggest that, although there is a significant relationship between sentiment measures and retail sales growth in several states, consumer sentiment exhibits only modest predictive power for future changes of retail spending.Measures of consumer sentiment, however, contain additional explanatory power aside from the information available in other indicators.We also find that by restricting our attention to fluctuations in retail sales that occur at the business cycle frequency we can uncover a significant relationship between consumer sentiment and retail sales growth in many additional states.In light of these results, we conclude that the practical value of sentiment indices to forecast consumer spending at the state level is, at best, limited.

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