Reference no: EM131133286

Consumer confidence, disposable income, and recessions

Go to the Web site of the University of Michigan Survey of Consumers (www.sca.isr.umich.edu) and download data on the annual Index of Consumer Sentiment from 1960 to the present day. We will use this data series as our measure of consumer confidence. Now, go to the Web site of the Economic Report of the President and download data from Table B-31 on the level of Disposable Personal Income per capita in Chained (2005) dollars. You will need to convert this series into an annual growth rate.

a. Before you look at the data, can you think of any reasons to expect consumer confidence to be related to disposable income? Can you think of reasons why consumer confidence would be unrelated to disposable income?

b. Explain why, in the analysis of consumption, we would want to an income measure in per capita (often called per person elsewhere in the text).

c. Plot the level of the index of consumer sentiment against the growth rate of disposable income per person. Is the relationship positive?

d. Plot the change in the index of consumer sentiment against the growth rate of disposable income per person. Focus on the portion of the graph where the change in disposable income is zero. Is the value of the level of consumer sentiment the same when income is not changing? Relate your answer to part (a). e. Now find every year where the growth in disposable income per person is negative. Does the index of consumer sentiment rise or fall in that quarter?

f. Focus in on the crisis years 2008 and 2009. How does the fall in consumer sentiment from 2007 to 2008 compare to the usual variation in consumer sentiment? Why? (Hint: The bankruptcy of Lehmann Brothers occurred in September 2008.) Although disposable income per person fell from 2008 to 2009, what happened to the level of consumer sentiment?