Do consumers' expenditures follow their sentiment?

Michigan University’s Consumer Sentiment Index has long been a barometer of the American public’s confidence in the economy and, by extension, an indicator of its willingness to spend. The purpose of this exploratory analysis is to investigate whether changes in consumer sentiment lead to changes in consumer expenditure patterns for different categories of spending, especially those that frequently lead to the accrual of significant debt.

While psychology-based behavioral economics experiments often focus on the relationship between an individual’s expressed preferences and their behavior, the Consumer Sentiment Index provides the means for a natural experiment to study this relationship on a larger scale. Better understanding of this relationship can lead to more effective capital investment strategies and more responsive public policy.

Using over thirty years of data, this study will focus on relationships between the Consumer Sentiment Index and various inflation-adjusted figures from the Consumer Expenditure Survey. In addition to total expenditures, three components are examined: owned housing; vehicle purchases; and education. As noted, consumers frequently finance these expenditures through increased debt, which has important implications for both their short and long-run financial status and stability. Exploratory analysis will consist of both graphical and basic statistical calculations. The different expenditure categories will be adjusted for inflation using their corresponding categories in the Consumer Price Index. Data examined are for the years 1984 to 2014.

Preliminary graphical analysis of total expenditures shows that consumer expenditures do follow consumer sentiment with a small lag. As can be reasonably expected, consumer sentiment reacts much more quickly than expenditures in response to changes in economic tides, and so what might appear as a divergence of economic behavior from economic sentiment could be accounted for by the amount of time it takes individuals to adjust their behavior to changing circumstances. The amount of time it takes for consumers to adjust their behavior, i.e., the lag between the Consumer Sentiment Index and Consumer Expenditures, seems to depend on the relative stability of the economy. As this is work in progress, similar analyses for the other expenditures mentioned are under construction, to see whether they follow similar or different paths than expenditures as a whole. Ramifications of patterns discovered will also be described with a focus on their implications for consumer debt at both the individual level and in the aggregate, including for policymaking.