The Influence of Consumer Sentiment on the Sales of Durables

Consumer sentiment is the key determinant of sales of durables...develops different models to show the potency of consumer sentiment in explaining the irregular pattern of consumer durable spending. Consumer sentiment is the most important predictor of consumer durables. Its predictability even improves during times of economic, political and international turmoil. The AR model, where consumer sentiment and durable sales lagged by one period are used as the independent variables, captures fairly well the combined explanatory power of all other variables such as personal income, unemployment and inflation used in traditional models. These are the findings of the study recently completed by the authors. It is axiomatic that, in general, the principal forecast variable of interest to producers and sellers is the buying behavior of consumers. Since the household sector contributes the largest portion of spending to national income, it is natural that the spending decisions of consumers receive the continuing attention of economic forecasters. Consumer spending is conventionally divided into spending on durable goods and spending on non-durables. Durable good spending is less stable than non-durable spending and is therefore more likely to be associated with the business cycle. Thus, durable goods spending is one of the predominant engines of economic instability for the economy and presents business planners with a major source of risk. A significant component of effective planning and decision making, for a wide variety of businesses, is the ability to forecast durable goods spending. While this is especially true for firms within durable goods industries, the integrated nature of the American economy implies that durable goods spending will, eventually, have an impact on all sectors of the economy. TRADITIONAL THEORIES Traditional theories of consumer spending emphasized prominent economic variables such as the level of personal income, interest rates, prices, and employment levels. Since the mid 1970's there has been interest in augmenting explanatory forecasting models with psychological factors. The psychological factors attempt to measure the influence of such things as media coverage of economic events, political change and international tensions. Psychological influences are measured through surveys of consumer attitudes. The two principal such surveys are the University of Michigan's Index of Consumer Expectations and the Conference Board's Consumer Confidence Index. It is upon the durable component of consumer spending that the psychological factors are expected to have the most influence. Durable expenditures are often discretionary and postponable. The presently owned automobile is a good, if not perfect, substitute for a new automobile. Thus, when consumers are uncertain or fearful regarding their economic futures, saving may increase and this will more likely come at the expense of a new refrigerator or TV than food, utilities or medical services. Casual observation of the business cycle during the last fifteen years shows that the Index of Consumer Expectations did indeed fall before the recessions of 1980, 1981 and 1990 and rose before the recoveries that followed each recession. However, there were also times when consumer sentiment fell, though to a minor and short-lived extent, when no recession followed. While appealing arguments can and have been made regarding the potential for the predictive power of consumer sentiment, the empirical evidence is somewhat mixed. Leeper (1992) reports that measures of consumer sentiment offer little, if any, information. Other research, however, points to a possible forecasting role for consumer sentiment. Throop (1991) demonstrates that consumer sentiment is significantly related to errors in predicting spending on consumer durables. Batchelor and Dua (1992) show that consumer uncertainties regarding real income and interest rates influence consumer spending. …