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Economic Quarterly

Fall 2003

Why Does Consumer Sentiment Predict Household Spending?

Yash P. Mehra and Elliot W. Martin

Consumer sentiment may predict future household spending, either because sentiment is an independent causal force or because it foreshadows current economic conditions. The empirical evidence we present favors the second interpretation. The evidence in previous research that favors the first interpretation is not robust because the analysis failed to control for the possible influences of expected changes in income and interest rates on consumer spending. Consumer sentiment foreshadows current expectations about the economy as well as about interest rates, suggesting that it is useful as a barometer of the near-term outlook for spending.

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