The Explanatory Power and the Forecast Performance of Consumer Confidence Indices for Private Consumption Growth in Turkey

In this study, we assess empirically whether consumer confidence indices contain information about future private consumption growth in Turkey. To this end, we estimate models for quarterly total, durable, and nondurable consumption growth with and without sentiment indicators. We evaluate in-sample forecasts and one-step-ahead out-of-sample forecasts from recursive ordinary least squares (OLS) estimates. We also test permanent income and precautionary savings hypotheses with our results. We use overall indices of CNBC-e and Turkstat-CBRT Surveys, and Consumer Expectations Index (CEI) and Propensity to Consume Index (PCI) from the CNBC-e Survey as sentiment measures. We show that the lagged values of consumer sentiment have explanatory power on consumption growth. However, when used in conjunction with other economic variables such as real labor income, real stock price, real interest rate, and exchange rate, only CNBC-e for total consumption, and CBRT and PCI for nondurable consumption provide independent information about future consumption growth. Similarly, the gains in out-of-sample forecasts are observed under the absence of other variables and disappear in almost all cases following their inclusion to the estimations. Finally, we find no clear evidence for either precautionary savings motive or permanent income hypothesis on the link between consumer sentiment and future total consumption changes.