Forecasting Consumption Spending Using Credit Bureau Data

This paper considers whether the inclusion of information contained in consumer credit reports might improve the predictive accuracy of forecasting models for consumption spending. To investigate the usefulness of aggregate consumer credit information in forecasting consumption spending, this paper sets up a baseline forecasting model. Based on this model, a simulated real-time, out-of-sample exercise is conducted to forecast one-quarter ahead consumption spending. The exercise is run again after the addition of credit bureau variables to the model. Finally, a comparison is made to test whether the model using credit bureau data produces lower or higher root-mean-squared-forecast errors than the baseline model. Key features of the analysis include the use of real-time data, out-of-sample forecast tests, a strong parsimonious benchmark model, and data that span more than two business cycles. Our analysis reveals evidence that some credit bureau variables may be useful in improving forecasts of consumption spending in certain subperiods and for some categories of consumption spending, especially for services. Also, the use of credit bureau variables sometimes makes the forecasts significantly worse by adding noise into the forecasting models