Consumer Sentiment Is Rising. How Optimistic Should That...

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THE STUDY JANUARY 13, 2012

Consumer Sentiment Is Rising. How Optimistic Should That Make Us?

Consumer sentiment is up for the fifth straight month in a row, a survey released today shows. Researchers are hesitant to see this as proof that long-term confidence has returned, but it is clear that more people are aware of the positive jobs news, and some believe the data could indicate a coming surge in consumer spending. How seriously should we take these numbers?

A 2001 study suggests that surveys of consumer sentiment, while somewhat useful, are of limited use in forecasting trends in consumer spending. An analysis of survey responses and economic performance showed that, first of all, consumers don’t always grasp the severity of economic downturns—they “underestimated the disinflation of the early 1980’s and in the 1990’s, and generally appear to underestimate the amplitude of business cycles.” Moreover, because the impact of economic shocks isn’t distributed evenly among different demographic groups, consumers are biased predictors of broader macroeconomic trends. Of course, this doesn’t mean that increased confidence is bad news: In fact, higher confidence does indicate, to some extent, growth in consumer spending. It’s just a bit premature to start celebrating. 

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