The truth about indicators of economic sentiment

At any given time, the theoretical value of the shares - this is just your present value of future dividends. Because the company earns money, theoretically, the profits will be paid to investors.

The task of the investor is to determine which company is going to profit and invest before the profit will be known.

Once the economic data becomes available, investors analyze them, and make forecasts for future profits.

Macro economists take account of these technical data, mainly in order to monitor investor sentiment. We try to focus on macroeconomic developments, which are driven by the market.

What seems meaningless to us, so that's why the markets reacted so strongly to indicators of moods.

These variables, as a rule, have no influence on consumer data, while investors often use them as important indicators for economic performance. In part, the sentiment indicators can be tracked in the media, which use them in their "intelligence forecasts. However, many educated and influential scholars, such as Christina Romer (Christina Romer), chairman of the Council of Economic Advisers, stated that economic recovery is directly related to the growth of consumer sentiment.

It would be wrong to think that sentiment indicators - this is empty talk, while they may raise the market on the same day the report was published, but is just as important to understand that the purchase should not be based on a simple interpretation of these indicators.

Consumer sentiment
The two main indicators of sentiment are University of Michigan Consumer Sentiment Index and the Conference Board Consumer Confidence Indicator. Both sources of data trying to explain the same thing: consumer behavior.

Consumer sentiment is very volatile. The chart above takes into account the three-month average of monthly changes in each of the indices from January 1979 to August 2009.

One of the biggest problems associated with the use of sentiment indicator is the ignorance of precisely what the indicator gives a correct estimate of consumer behavior. Of the 377 months, as reflected in the chart, 115 months show indicators that move in the opposite direction. How can we trust that, what they believe consumers if 31% of the time we are confronted with contradictory information

In fact, indicators of consumer sentiment - it's just snapshot of consumer sentiment. As you know, advertising can significantly affect the way that people will buy. Similarly, then, in the light of what the media convey news, plays an important role in determining consumer sentiment. The above graph shows two indicators of attitudes that are associated with reading a certain number of news in the title of which used the word "recession", according to Google.

Indicators sentiment began a trend to decrease smoothly when the word "recession" has entered the lexicon in the mid-2007. As soon as the line of this trend took off, the index of sentiment began to decline more rapidly. Similarly, when the word "recession" began to eat less often in the media, the indicators again moved up. We can see a similar relationship in the context of the indicators of sentiment, if we use "economic recovery" or "green shoots" as the search words.

Also, such relationships in terms of attitudes can be attributed to fuel prices.

Mainly, sentiment indicators point to media reports, fuel prices, unemployment and stock indices.

Consumer sentiment and consumption
Objective indicators of sentiment is to explain potrebitelelskoe behavior. Often means that consumer sentiment and consumption are inextricably linked. Consequently, consumer sentiment should reflect the growth in consumer spending.

Unfortunately, consumption and attitudes have nothing in common.

Using a simple statistical regression chart above predicts real personal consumption expenditures, based on an index of consumer sentiment. The obvious result is that there is no indicator of sentiment not cope with predicting actual consumption.

It is likely that the cause of the impossibility of predicting any indicator of overall consumer spending is that the mood dramatically volatility. Instead, perhaps they would be better used to predict changes in consumer spending. Thus, if the consumer feels better this month, it will increase their costs.

Using the same statistical method, changes in consumption can not be predicted a change in sentiment.

Consumption can not be predicted using simple indicators of mood.

What really predicts the level of consumption?
The best indicator for predicting consumption has always been profit.

As you can see, the prediction of consumption by means of real personal income is very close to the actual personal expenses.

Relationship should be very close. There are only two choices as consumers can do with income: save or spend.

The difference between projected and actual personal expenses is the difference between the rate of actual and intermediate savings. When in 2008 in connection with the beginning of the process of reducing leverage soared savings rate, the expected value of real private consumption expenditure differed from the existing one.

What it all means
Media have a tendency to over-inflate the importance of indicators of consumer sentiment and as a result, it causes an acute reaction in the markets is the day when the news sounded.

Economists think this is strange. Sentiment index simply demonstrate how the consumer responds to media reports, fuel prices, unemployment and stock prices.

For those who are going to work in the market in the long run, these indicators are not linked to the prediction of consumption. You should not use the positive developments and the mood as an indicator that the consumer back to consumption.

If you need to predict the level of consumption, the best indicator may be the level of income.

The Truth About Economic Sentiment Indicators
Briefing
October 12