Keywords: Consumer sentiment, stock market, Michigan survey
Abstract: This paper examines the relationship between movements in consumer sentiment and
stock prices. At the aggregate
level, the two share a strong contemporaneous relationship: an increase in
equity values boosts sentiment.
However, I examined the nature of the relationship between the
two. Does an increase in stock prices
raise aggregate sentiment because people are wealthier or because they use
movements in stock prices as an
indicator of future economic activity and potential labor income growth? Using
individual observations from the
Michigan survey I found results more consistent with the view that people use
movements in equity prices as a
leading indicator. Although the findings do not rule out a traditional wealth
effect, they do raise some questions
about the causal role of wealth in aggregate spending.
Full paper (1270 KB PDF)
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Last update: December 28, 1999