Consumer spending is highly affected by changes in economic conditions, which impacts future expectations. Changes in the customer sentiment indices show the alteration in the expectations of future economic status, which consequently affects consumption. For instance, Hall (1993) and Blanchard (1993) claimed that the 1990-1991 recession in America was caused by the reduced consumption predicted by consumer sentiment. The prices of assets were reduced, especially housing wealth. Understanding the impacts of the changes in expectations on consumer spending is essential. Recently, the COVID-19 pandemic affected the economic conditions, which affected consumer spending even after the vaccine that assisted in eliminating the virus due to the belief of rare events. Makridis (2020) and Gillitzer & Prasad (2018) seek to explore the connection between consumption and economic sentiment. Consumer sentiment is an economic indicator that analyzes how optimistic consumers are toward the economy and their finances. It plays an essential role for economists and policymakers to explore the future regarding employment and prices.
Makridis (2020) argues that evaluating the effects of economic conditions and consumer spending is challenging for two reasons. One, there needs to be more data because consumer sentiments are affected by several factors. Secondly, consumption sentiments are interconnected by local and national time-dependent and time-independent factors such as preferences and an individual’s income. The paper seeks to examine the influence of local factors in the formulation of beliefs and quantify the causal impacts of the economic conditions on consumer spending, especially as a possible technique that caused the rapid reduction in consumer spending during the 1990-1991 Great recession in America.
Makridis (2020) introduces new, approved data from Gallup. The data was collected between 2008-2017 in American daily polls consisting of survey responses. Makridis (2020) terms these data as necessary because Gallup has an extensive survey framework and accurate methodology, allowing him to collect data representing the nation at a high frequency and time. Second, the respondents in the survey gave their perception of the current and future status of the state economy, demographic features, income, and nondurable consumer expenditure, which helps determine consumption and business sentiment. Third, the respondents also provided their zip code in the survey which aided in isolating the impacts of the local shocks, controlling for the total and local economic conditions.
Makridis (2020) created a new measure of business sentiment, the economic confidence index (ECI), and compared it with the volatility index developed by The University of Michigan and the economic policy uncertainty index formulated by Baker et al. (2018). Economic confidence index “adds the percentage of respondents rating current economic conditions ((”Excellent” + ”Good”) − ”Poor”) to the percentage saying the economy is (”Getting better” — ”Getting worse”) and then dividing that sum by 2″. It also measures the role of regional alterations in the housing and labor markets. For instance, an increase in state employment and the growth in zip code house prices are connected with a rise in perception about the current economic condition of a nation and the possibility that an individual believes in an improving economic condition. However, this perception is consistent among individuals owning homes and fields where beliefs influence aggregate actions.
Makridis (2020) argues that the microeconomic impacts of business sentiments are based on consumer spending on nondurable goods such as automobiles. The paper analyzes the variations in an individual’s exposure to the growing prices in the housing sector within the social network as well as those with friends exposed to the growth in house prices who receive the good news. In return, their beliefs are influenced. Makridis (2020) also used the social connectedness index (SCI) by Bailey et al. (2018) to formulate an SCI-weighted index on the growth of housing prices which excludes relative differences in friendship links in every zip code as an approach for consumer sentiment. The research shows that an increase in business sentiment is interconnected with an increase in consumer spending on nondurable items, which is equivalent to shifting an individual’s belief the economy is in a recession to believing it is growing.
The paper contributes to the upcoming literature that explores the interconnection of consumption and subjective expectations. Several studies show that consumer spending changes depending on whether the preferred political candidate wins the elections hence utilizing the reforms in a political result as a factor that affects consumer sentiment to show the strong impact of economic view on consumer spending. It also contributes to the scientific literature on the formulation of beliefs. Makridis (2020) provides various examples that outline how personal experiences shape belief, including inflation, economic crisis, loss of jobs, COVID-19, and gasoline prices. The paper builds on socioeconomic status to analyze how local employment and housing price results influence economic sentiments. The research only covers the surface and points that can be used in further research to establish whether economic conditions are a causal factor of subjective well-being. How do sentiments affect actual economic activities? And does a drop in business sentiment during the financial crisis explains the protracted recovery?
Gillitzer & Prasad (2018) argue that the interconnection between the increase in consumer spending and sentiment may indicate a similar factor, for instance, changes in the current salaries that impact consumption and belief. It is challenging to determine if reforms to consumer sentiment have underlying impacts on consumer spending since it is hard to evaluate the variations in beliefs unrelated to differences in economic basics. The paper uses cross-sectional disparities in sentiment associated with political preferences in an individual to isolate differences in opinions unrelated to the alterations in economic basics. Gillitzer & Prasad (2018) use data from an Australian survey on consumer sentiment since it specifically seeks individual responses about their voting goals. The report shows that sentiments increase when the individual’s preferred political party holds office compared to those that belong to the opposition party. The paper uses the voting goal as the tool for sentiment in the identification method.
Gillitzer & Prasad (2018) claim that for the identification method to be accurate, the voting goal should meet the exclusion criteria of influencing consumer spending only using sentiment rather than economic basics. This is mainly because reforms in government cause rapid changes in sentiments and may utilize the participants’ observable economic and demographic features to regulate the impacts of future economic policy reforms. The argument is based on the fact that the federal government formulates economic policies that target particular groups of individuals depending on observable features, such as their age or profession.
The paper utilized two measures of consumption to determine if the variation in sentiment between the winning and opposition voters at the reforms in government impacts consumption. The first measure is the individual’s spending decisions for big household items and motor cars. The second measure involved utilizing geographic disparities in vote distribution across the zip codes and motorcars bought by homes as a zip code-level usage proxy. The reports from the first measure show that individuals have more positive spending habits for household products and automobiles when their political aspirant holds office. Gillitzer & Prasad (2018) also focused on the period between the change in leadership at a personal level using economic and demographic measures to determine the impacts of sentiments on consumption. This method applies only to differences in sentiments linked with voting goals to assess the implications of belief on consumer spending. The zip code level measure approach helps evaluate consumer spending behavior data related to the actual consumer behavior. The report shows that high levels of sentiment results in increased positive consumer spending goals. The paper utilizes an identification approach that differs from existing literature since it incorporates time-series data, eliminating all aggregate local shocks that impact consumption and sentiment.
The paper makes two significant contributions to the literature. First, it proves that consumer sentiment has a causal impact on consumer spending. The research findings show that alteration in sentiments affects consumption; hence sentiments are a primary factor in economic actions. Second, utilizing geographical disparities in consumer disparities and buying automobiles helped gain support for the importance of consumer spending behavior. Consumers become more optimistic about their economic status when the political party they support holds the government. Gillitzer & Prasad’s (2018) research study shows that consumer spending habits affect consumer sentiment, which can be used by researchers who want to utilize spending habits to analyze consumer behaviors.
Bailey, M., Cao, R., Kuchler, T., Stroebel, J., & Wong, A. (2018). Social connectedness: Measurement, determinants, and effects. Journal of Economic Perspectives, 32(3), 259-80.
Bailey, M., Cao, R., Kuchler, T., & Stroebel, J. (2018). The economic effects of social networks: Evidence from the housing market. Journal of Political Economy, 126(6), 2224-2276.
Gillitzer, C., & Prasad, N. (2018). The effect of consumer sentiment on consumption: Cross-sectional evidence from elections. American Economic Journal: Macroeconomics, 10(4), 234-69.
Makridis, C. A. (2022). The social transmission of economic sentiment on consumption. European Economic Review, 148, 104232.