Forecasting consumers’ expenditure: A comparison between economic and neural network models

This paper is motivated by the difficulties faced by forecasters in predicting the decline in the growth rate of consumers’ expenditure in the late 1980s. The econometric specifications of four competing explanations are replicated and the static forecasts compared with the actual outturns. The same data are then used to estimate neural network models. The main issue is whether the neural network technology can extract any more from the data sets provided than the econometric approach. It is found that the neural network models describe the decline in the growth of consumption since the late 1980s as well as, but no better than, the econometric specifications included in the exercise, and are shown to be roubst when faced with a small number of data points. However, whichever approach is adopted, it is the skill of choosing the menu of explanatory variables which determines the success of the final results.