Improving macro-economic forecasts: The role of consumer confidence

The failure of economic forecasters to predict the most recent US recession has renewed interest in the idea of supplementing model-based forecasts with information from other, more qualitative, indicators. This paper tests whether one such variable, the consumer confidence index, could have improved these forecasts; and whether improvements are greatest for forecasts generated by econometric models with little judgmental adjustment. We find that consumer confidence would have been helpful in predicting the 1991 recession. But the result does not generalize to other years, and appears to reflect the special nature of the recession rather than a persistent weakness in forecasting technique.