Forecasting Power of the Consumer Confidence Indices to Household Consumption Expenditures

Abstract

Consumer confidence can strongly affect future consumption. In this paper, consumer confidence is measured by the consumer confidence indices from the Conference Board of Canada. We examine the ability of the consumer confidence indices to predict future consumption in Canada overall and in the Canadian provinces. For the national level, the results suggest that the consumer confidence indices are able to explain the changes of household consumption expenditures for various consumption categories. The predictive ability of the consumer confidence indices is weakened by adding control variables such as labor income, interest spreads and the Toronto Stock Exchange Index. For the provincial level, consumer confidence indices still predict some of the consumption categories. However, the predictive power is very weak when we include control variables in provincial analysis. Overall, consumer confidence indices are able to forecast Canadian household consumption expenditures.