CONSUMER CONFIDENCE AND
ECONOMIC GROWTH – A CASE STUDY
BY
KELVIN A SERGEANT
Paper presented at the 4th Biennial International
Conference on Business, Banking and Finance – Theme
Restoring Business Confidence & Investments in the
Caribbean
June 22 – 24, 2011
Hilton Trinidad and Conference Centre
OBJECTIVES OF THE STUDY




To identify the functional identity of consumer
confidence.
To determine the relationship between CCI and
economic growth( as well as interest rates and
the exchange rate
To determine if a long-run relationship exists (cointegration)
To see if we can make conclusions on based on
the psychological framework of consumers
WHAT IS A CONSUMER CONFIDENCE INDEX?
•
A consumer confidence index measures how
consumers feel about several economic factors.
The measure is based on several questions put by
an interviewer to the consumer. The result which
is represented by a numerical value, speaks to
consumers evaluation of their own financial
situation, employment chances, expenditure
intentions and their opinion of general economic
conditions.
WHAT IS THE RATIONALE FOR SUCH AN INDEX?





Consumption is an important determinant in any economy
Personal consumption expenditure usually represents the
single largest sector or driver of GDP (income side)
The CCI seeks to gauge consumer spending through
consumer sentiment
Consumer confidence is measured or observed through
consumer surveys
The most famous and oldest measure of CC is the US
survey conducted by the Conference Board and the
University of Michigan Consumer Sentiment index
FEATURES OF THE CCI




The CCI may be related to macroeconomic variables such
as inflation
Relating the index to macroeconomic variables suggest that
confidence is boosted by lower inflation, lower interest
rates and higher real income
Consumer confidence is called a lagging indicator in that
current behaviour is based on the past and it can take some
time to turn around
Enterprises make use of consumer indices to enhance the
sophistication of their planning, advertising and marketing
strategies.
LIMITATIONS OF THE CCI AS AN
INDICATOR OF ECONOMIC WELL BEING





Economic crisis may affect confidence and not spending,
e.g., stock market crash of 1987
The lag effect – consumer confidence either persists after
the end of a growth period, or remains depressed after a
recession has ended
The Republic Bank/MFO index has the same flaws as most
indices
Public sentiment about an occurrence may run counter to
spending pattern
Index is still in its embryonic stage
CCI IN THE CARIBBEAN

In the Caribbean only two countries, Trinidad
and Tobago and Jamaica continuously measure
and track business and consumer sentiment. In
Trinidad and Tobago, Republic Bank Limited and
Market Facts and Opinions produce the
Consumer Confidence Index, and the Arthur Lok
Jack Graduate School of Business, University of
the West Indies, produces the Corporate
Confidence Index. In Jamaica, the Jamaica
Conference Board is responsible for both indices.
PREVIOUS RESEARCH

One can separate the literature on consumer confidence
into three distinct approaches.
 The first argues that there is a significant and strong
relationship between consumer sentiment and
consumption expenditures (carroll et al. 1994).
 The second fails to find any supportive evidence of
empirical significance, rejecting the validity of consumer
confidence as a leading indicator (Garner, 1991).
 The
third uses some form of unconventional
methodology to bridge the gap between qualitative
survey data and quantitative analysis, resulting in
favourable (Jansen and Nahius, 2003) and nonfavourable evidence (Dominitz and Manski, 2004).
 However, the common point of all these studies is to
focus on the explanatory power of consumer confidence
thus restricting it to the role of an exogenous variable.
OUR APPROACH
This paper also employs some unconventional methodology by
assessing the determinants of consumer confidence in Trinidad
and Tobago so that the functional identity of consumer confidence
is revealed. This is important for three reasons.



a favourable finding will mean that in Trinidad and Tobago,
consumers behave different due to the dynamic economic
structure;
second, consumer confidence measures in Trinidad and Tobago
should be considered with care (rather than just some data); and
last, we will have insight into the psychological frame work of
consumers in emerging markets where there is certainly a
difference between ability to buy and willingness to buy.
METHODOLOGY OF THE REPUBLIC BANK/MFO
CONSUMER CONFIDENCE INDEX



The Survey is conducted door-to-door, with a randomly selected
nationally representative sample of 500 households
The neighbourhoods used in the sample were randomly selected
over the broad areas of North East, North West, Central and
South Trinidad, and Tobago.
The MFO/Republic Bank Consumer Confidence Index is based
on consumers’ opinions of current and expected personal
finances, business conditions and purchasing conditions. The
Index of Current Consumption (ICC) and the Index of
Consumption Expectation (ICE) are incorporated in the Index
of Consumer Confidence or Index of Consumer Sentiment
(ICS).
CCI
GDP
0
IR
ER
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
20
Jun-08
40
Dec-07
60
Jun-07
80
Dec-06
Rate
Jun-06
100
Dec-05
120
Jun-05
140
Dec-04
160
Jun-04
180
Dec-03
Evolution of CCI and
GDP Indices
Jun-03
200
Dec-02
Jul-10
Dec-09
May-09
Oct-08
Mar-08
Aug-07
Jan-07
Jun-06
Nov-05
Apr-05
Sep-04
Feb-04
Jul-03
Dec-02
BEHAVIOUR OF VARIABLES IN THE STUDY
Evolution the Interest Rate
and Exchange Rate
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
METHODOLOGY OF STUDY

Basic Regression model:


CCI= C + GDP + ER + IR + u t
Determine whether a long run equilibrium
relationship exist between consumer confidence and
GDP (cointegration).
A necessary condition for cointegration is that these series
must be non stationary and integrated of the same order.
 Apply the Perron Unit Root Test to establish whether
variables are non-stationary



Establish the direction of causality using the
Granger- Causality test
Apply the Impulse Response function to observe the
behaviour of the endogenous variable to external
shocks to any of the exogenous variables
RESULTS OF THE UNIT ROOT TESTS
Variable
Level
First Difference
CCI
-6.098
……….
∆GDP
-6.530
……….
IR
-5.352
-6.389
ER
-10.939
……….
5% critical value
-5.590
-5.590
The results indicate that the CCI, ∆GDP and ER are stationary in levels,
while IR is non-stationary in levels. Hence, a long run equilibrium
relationship among the variables cannot be established
RESULTS OF THE GRANGER-CAUSALITY TEST


Bivariate Model 1: The null hypothesis that CCI does not
Granger–cause GDP is rejected at 5% and 10% level of
significance. Also the null hypothesis that GDP does not
Granger-cause CCI is also rejected at the 5% and 10% level of
significance. This means that GDP helps to predict CCI and
CCI helps to predict GDP.
Bivariate Model 2: the null hypothesis that CCI does not
Granger-cause IR is rejected at the 10% level. However, the null
hypothesis that IR does not Granger- cause CCI is accepted at
levels of significance. Therefore it can be concluded that, that
while CCI helps to predict interest rates, interest rates does not
help predict consumer confidence.


Multivariate Model. The results indicate that CCI helps predict
GDP and vice versa. It also indicates that GDP to a small extent
helps predict the exchange rate. However, the exchange rate
and the interest rate do not help to predict any variable in the
model
RESULTS OF THE IMPULSE RESPONSE
FUNCTION


The response of consumer confidence to a shock in GDP
will initially lead to a drop in consumer confidence in the
first and second quarters, however, the consumer
confidence will trend towards positive as the lag increases.
This justifies the CCI variable as a lagging indicator and
supports our belief that initially, CCI will not respond to
increases in GDP, but after a period of time, there will be a
positive response in accordance with a priori expectations
depending on economic theory. We note also the negative
response of the interest rate variable again in line with our
initial expectations.
RESPONSE TO CHOLESKY ONE S.D. INNOVATIONS
Response to Cholesky One S.D. Innovations ± 2 S.E.
Response of LCCI to LCCI
Response of LCCI to DLGDP
Response of LCCI to IR
Response of LCCI to ER
.2
.2
.2
.2
.1
.1
.1
.1
.0
.0
.0
.0
-.1
-.1
1
2
3
4
5
6
7
8
9
-.1
1
10
Response of DLGDP to LCCI
2
3
4
5
6
7
8
9
-.1
1
10
2
Response of DLGDP to DLGDP
3
4
5
6
7
8
9
1
10
.03
.03
.03
.02
.02
.02
.02
.01
.01
.01
.01
.00
.00
.00
.00
-.01
-.01
-.01
-.01
-.02
1
2
3
4
5
6
7
8
9
-.02
1
10
2
Response of IR to LCCI
3
4
5
6
7
8
9
2
3
Response of IR to DLGDP
4
5
6
7
8
9
1
10
1.0
1.0
0.5
0.5
0.5
0.5
0.0
0.0
0.0
0.0
-0.5
-0.5
-0.5
-0.5
-1.0
2
3
4
5
6
7
8
9
-1.0
1
10
2
Response of ER to LCCI
3
4
5
6
7
8
9
2
Response of ER to DLGDP
3
4
5
6
7
8
9
1
10
.04
.04
.04
.03
.03
.03
.02
.02
.02
.02
.01
.01
.01
.01
.00
.00
.00
.00
-.01
-.01
-.01
-.01
-.02
2
3
4
5
6
7
8
9
10
-.02
1
2
3
4
5
6
7
8
9
10
7
8
9
10
3
4
5
6
7
8
9
10
3
4
5
6
7
8
9
10
9
10
Response of ER to ER
.03
1
2
Response of ER to IR
.04
-.02
6
-1.0
1
10
5
Response of IR to ER
1.0
1
2
Response of IR to IR
1.0
-1.0
4
-.02
1
10
3
Response of DLGDP to ER
.03
-.02
2
Response of DLGDP to IR
-.02
1
2
3
4
5
6
7
8
9
10
1
2
3
4
5
6
7
8
CONCLUSION




We found that consumer confidence can have an
endogenous nature and has a strong relationship to GDP.
However, in our model, we found only a short-run
relationship as the results of the tests led us to conclude
that CCI, GDP and ER are stationary in levels while IR is
non-stationary in levels.
the series had different order of integration and as such, a
long-run relationship among the variables could not be
established.
We therefore support the use of the consumer confidence
index as a short-run policy variable
THANK YOU