Determinants of Consumer Sentiment – Evidence from Household Survey Data *

Detelina Ivanova & Kajal Lahiri

The Index of Consumer Sentiment (ICS) is known to add power to forecasts of aggregate consumption. However, a large portion of the variation in ICS over time cannot be explained by macroeconomic factors. We study the five questionsin the Survey of Consumer Attitudes and Behavior on personal finances, general business conditions, and timing of durable purchases, which are used to construct the ICS, using pooled cross-section time series data from 01:1978 to 12:1993 in an ordered logit model. Data on consumers’ perceptions and expectations about personal finances, news, government approval, aggregate unemployment, and inflation, as well as personal characteristics and actual economic conditions have been utilized to investigate the relative importance of these factors for the ICS. We find that the most important factorsaffecting the ICS are consumers’ approval of the economic policy of the government and their expectations of aggregate unemployment and own family income over the one-year run. Once these factors have been taken into account, epectations of inflation and interes rates do not contribute significantly to the explanatory power of the model, and neither do past values of unemployment, inflation, T-bill rate, or stock market return. In terms of the percent of correct predictions and other diagnostic tests, the estimated models exhibited remarkable stability over time.