Friday, September 26, 2014

Does Improvements in Consumer Sentiment and GNP Indicate Future U.S. Growth?

The University of Michigan recently announced improvements in consumer sentiment from 80 in March to 84.6 in September (1).  Consumers who have been frugal with their pay checks over the past may now be willing to open their wallets. Increased consumer spending matched with improvements in Gross National Product (GNP) could be a good sign for the economy. 

Consumer sentiment and sales are two different things but certainly positive impressions today can lead to increased sales tomorrow.  According to Gelper, et. al. (2007) positive consumer sentiment is followed by increased purchases of products and services in the trailing 4-5 months. They argue that consumer sentiment maintains some predictive power over consumer spending. 

Another complementary announcement by the Commerce Department posted a rise in Gross Domestic Product (GDP) to 4.6% (2).  Positive GNP numbers were realized from personal consumption expenditures, exports, private inventory investment, state and local government spending, nonresidential fixed investments, and residential fixed investments.  

Consumer sentiment does have an impact on GDP. Negative consumer sentiment can lower GNP and positive consumer sentiment can raise GNP even though they are not associated with traditional market fundamentals (Matsusaka & Sbordone, 1995).  Contrary to popular opinion, consumer sentiment is strong enough to influence a 13 to 26 percent variance in GNP. 

Together these numbers support the idea that growth in consumer spending is more likely over the next few months. A short lag is not necessarily a bad thing if consumer spending also prompts American manufacturers to invest more in their operations to fulfill consumer needs and further strengthen GNP. It is possible that long-term exports could rise as U.S. based companies find parity with low cost foreign providers. 

Gelper, et. al. (2007). Consumer sentiment and consumer spending: decomposing the Granger causal relationship in the time domain. Applied Economics, 39 (1). 

Matsusaka, J. & Sbordone, A. (1995). Consumer confidence and economic fluctuations. Economic Inquiry, 33 (2).

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