RDP 2001-09: What do Sentiment Surveys Measure? 1. Preamble and Overview

Indices of business and consumer sentiment receive widespread media coverage and are closely watched by market economists.[1] A serious fall in any of the better-known indices is generally viewed with concern despite limited evidence of any predictive ability. Many people assume that business or consumer sentiment indicators actually measure the elusive quantity known as ‘confidence’ and, thus, offer insights over and above what we can glean from more commonplace indicators such as GDP and employment. If this were true, there would indeed be reason to think that they could help predict future changes in economic activity. However, the answers consumers and business executives give to questions about current and future economic conditions are clearly informed by news and personal experiences over the preceding months, some of which may in turn be reflected in data that were already available. This invites the question: do surveys tell us a great deal more than we already know?

In the first part of this paper we address this question directly. We look at whether various sentiment indicators can be explained on the basis of commonly available economic data. We find that much of the movement in sentiment indicators can be explained by variables such as GDP, interest rates and job vacancies. While this diminishes much of the significance attached to the surveys, it still leaves open the possibility that the remaining variation in the series is informative. The second section of this paper considers what sentiment indicators might reflect in more detail. We consider whether the surveys can be used to forecast any of the major economic indicators.


The Sydney Morning Herald of 15 March 2001 had a particularly dire headline ‘$A reeling with huge plunge in consumer faith’ after the release of the March 2001 Westpac-Melbourne Institute consumer confidence survey. [1]