Zandi on Consumer Confidence

Confidence normally reflects economic conditions; it does not shape them. Consumer sentiment falls when unemployment, gasoline prices or inflation rises, but this has little impact on consumer spending. Yet at times, particularly during economic turning points, cause and effect can shift. Sentiment can be so harmed that businesses, consumers and investors freeze up, turning a gloomy outlook into a self-fulfilling prophecy. This is one of those times.

How would we know if this was true? What you are saying is that I can forecast sentiment using economic variables except when things turn sharply and then I can only forecast variables using sentiment.

Isn’t the obvious implication that people knew things were about to go bad for them personally and so their sentiment turned. Isn’t it convenient that turning points are the only place when the causality reverses.

Perhaps that simply means that the model can’t see around the corner while the consumer can.

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