Sentimental, Rational and Useful? A Directional Analysis of Consumer Sentiment Surveys in the US and the UK

Consumer sentiments indices are widely used by business and government. Their potential for forecasting future economic activity is the subject of ongoing research. This paper aims to assess the directional accuracy and potential value to external users of households' sentiments data compiled by the Survey Research Centre at the University of Michigan for the USA, and by the GFK Organization for the UK. We find that these sentiments are predominantly rational, that is, the sign of these predictions is unbiased. Both US and UK households provide useful predictions of their own subsequent, subjective assessment of outcomes. Otherwise their value in predicting the direction of change is more ambiguous. Households appear to have a very specific concept in mind when forming expectations of their own financial position, and this concept differs between the two c countries. When predictions and retrospective assessments are evaluated against corresponding empirical outcomes, we find that US households have much the more coherent sentiments.