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Vol. 87, No. 2, Part 1 (Posted 2005-03-01)

Does Consumer Sentiment Predict Regional Consumption?

by Thomas A. Garrett, Rubén Hernández-Murillo, and Michael T. Owyang

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 consumer sentiment measures and retail sales growth in several states, consumer sentiment exhibits only modest predictive power for future changes in retail spending. Measures of consumer sentiment, however, contain additional explanatory power beyond the information available in other indicators. By restricting attention to fluctuations in retail sales that occur at the business cycle frequency, the authors uncover a significant relationship between consumer sentiment and retail sales growth in many additional states. In light of these results, the authors conclude that the practical value of sentiment indices to forecast consumer spending at the state level is, at best, limited.

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