Independent Business Research Analysis
Explanation of the Economics or Business Issue:
This paper explores the relationship between consumer confidence, unemployment and consumption. In this paper, consumption is the dependent variable whereas unemployment and consumer index are the independent variables. Barrel, R. et al (2008) states that consumption is affected by the ability to pay and the willingness to pay, this means that even with high income levels in the economy, consumption may still be affected by their perception of the economy which is reflected by the confidence index. There is also a relationship between consumer confidence and unemployment rates.
Previous studies indicate that there is a relationship between consumption and consumer confidence whereby consumer confidence can be used in determining consumption levels and economic performance. Previous researchers have highlighted the importance of consumer confidence on the economy highlighting its effects on economic growth, consumption and recessions.
This paper also analysis the relationships between employment and consumer confidence, the relationship of this variable indicate that there is a negativerelationship between unemployment and confidence, this means that as unemployment increases then consumer confidence declines. Results of this study also indicate that the relationshipbetween consumption and confidence is negative; this means that as confidence increases then the consumption level declines.
Regression results indicate that consumer confidence and unemployment are weak predictors of consumption levels in the economy, this means that the relationship between these variable is weak although the coefficient of unemployment is significant at the 95% level of confidence. Hypothesis results indicate that the relationship between consumption and consumer confidence is not significant while the relationship between unemployment and consumption is statistically significant.
Hypothesis:
The hypothesis in this research study is to explore whether an increase in consumer confidence will result into increased consumption. The other hypothesis is to explore whether there is a relationship between consumption and consumer index. Unemployment and consumer confidence in this case are the independent variables whereas consumption is the dependent variable.
Background:
ECB (2011) states that financial crisis like the one experienced in the year 2007 originate from a collapse in consumer confidence, the article also states that it is still difficult to determine whether financial crisis are the cause of a decline in consumer confidence or vise versa. Consumer expenditure is affected by factors such as political environment in a country, war and tension in the economy will affect the willingness to spend. (ECB, 2011, pp 7)
Barrel, R. et al (2008) states that consumption is affected by the ability to pay and the willingness to pay, this means that even with high income levels in the economy, consumption may still be affected by their perception of the economy which is reflected by the confidence index. There is also a relationship between consumer confidence and unemployment rates. (Barrel, R. et al, 2008, pp 2)
Bram, J (2012) states that consumer sentiment was one factor that led to the 1990 recession, according to this article consumer confidence influences speculation and affects financial markets. For this reason, it is evident that the level of confidence in the economy has an imp0act on the performance of the economy.
Zaretsky, A. (2012) focused on unemployment and consumer confidence, according to him, higher unemployment was likely to reduce the levels of consumer confidence. Therefore, there is a relationship between consumer confidence and unemployment. Ludvigson, S. (2004). Also focused on consumer spending and confidence according to him there is a relationship between consumer confidence and consumption. (Ludvigson, 2004, pp 29)
Data description:
Data sources:
There variables are required to test the hypothesis and to estimate a regression model, due to availability of data, monthly data was retrieved for the year 2007 to 2011. Consumer confidence data was retrieved from the University of Michigan website available at http://research.stlouisfed.org/fred2/series/UMCSENT/downloaddata?rid=91&soid=14.
Unemployment rates data was retrieved from the bureau of labor statistics website available at http://data.bls.gov/timeseries/LNS14000000. Personal consumption data was retrieved from Y chart website, which is available at http://ycharts.com/indicators/personal_consumption_expenditures.
Graphical analysis:
The following graphs summarize the variables for the period 2007 to 2011:
Consumer confidence:
The chart indicates a downward trend in consumer confidence.
Unemployment and consumption:
The chart indicates an upward trend in unemployment levels. The chart shows an increase in consumption for the period 2007 to 2008 followed by a decline and then an increase for the period 2009 to 2011.
Correlation:
Descriptive statistics:
The following are the descriptive statistics:
consumer sentiment
Standard Error
Standard Deviation
Sample Variance
Median, mean and mode
The mean consumer confidence index is 69.63, the mode is 73.6 and the median is 70.05. these values indicate that there is a possibility that the distribution is not normal.
dispersion
The standard deviation is 8.37 showing that values deviates 8.73 units from the average value. The variance is 70.17.
Shape:
Kurtosis value is -0.135 while the skewness value is 0.2951, this means that the distribution shape is not symmetrical and is in fact positively skewed.
Range, maximum and minimum:
The maximum value is 90.4, the minimum value is 55.3, and this means that the range is 35.1. unemployment
Standard Error
Standard Deviation
Sample Variance
Median, mean and mode
The mean unemployment rate is 7.85, the mode is 9.5 and the median is 9. These values indicate that there is a possibility that the distribution is not normal.
Dispersion
The standard deviation is 2.03 showing that values deviates 2.03 units from the average value. The variance is 4.14.
Shape:
Kurtosis value is -1.40 while the skewness value is -0.61, this means that the distribution shape is not symmetrical and is in fact negatively skewed.
Range, maximum and minimum:
The maximum value is 10, the minimum value is 4.4, and this means that the range is 5.6.
consumption
Standard Error
Standard Deviation
Sample Variance
Median, mean and mode
The mean consumption is 10.15, the mode is 10.23 and the median is 10.09. These values indicate that there is a possibility that the distribution is normal.
Dispersion
The standard deviation is 2.89 showing that values deviates 2.89 units from the average value. The variance is 0.083.
Shape:
Kurtosis value is -0.257 while the skewness value is 0.844, this means that the distribution shape is not symmetrical and is in fact positively skewed.
Range, maximum and minimum:
The maximum value is 10.84, the minimum value is 9.764, and this means that the range is 1.076.
Statistical analysis:
Correlation
Using Excel, the correlation matrix was determined, the following table summarizes the correlation coefficients:
consumer sentiment
unemployment
consumption
consumer sentiment
The above results indicate that:
The correlation between consumer confidence and consumption is negative (-0.2998)
The correlation between unemployment and consumer confidence is negative (-0.2555)
The correlation between unemployment and consumption is positive (0.358)
Regression
The regression model:
Y = a + Bx1 + Bx2 is estimated where Y is consumption, X1 is consumer confidence and X2 is unemployment.
The results are as follows:
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Significance F
Coefficients
Standard Error
t Stat
P-value
Lower 95%
Upper 95%
consumer sentiment
The estimated model is
Consumption = 10.35 + 0.042 employment – 0.007689 consumer confidence
The results indicate that there is a negative relationship between consumer confidence and consumption. Whereby an increase in consumer confidence will reduce consumption. On the other hand, an increase in unemployment will increase employment. The R squared value is 0.174, which means that only 17.4% of changes in consumption are explained by unemployment and consumer confidence.
Results of this study indicate that there is a very weak relationship between consumer confidence and consumption, there is a weak relationship between unemployment and consumer confidence. However, results still indicate that unemployment will affect consumption with the p value of this variable being 0.02 meaning it is significant at the 95% level of confidence.
Conclusion:
Previous analysis indicates that there is a relationship between consumption and consumer confidence, also that there is a relationship between consumer confidence and unemployment. The result of this study indicates that there is a weak relationship between unemployment and consumption, and confidence and consumption. Graphical representations indicate that consumer confidence has declined over time and unemployment levels have increased. Further study should aim at determining the roles of consumer confidence in recessions and economy performance.
Bibliography:
Barrel, R. et al (2008).Consumer Confidence Indices and Short-Term Forecasting Of Consumption. Retrieved on 21st May, from http://www.niesr.ac.uk/pdf/250208_114621.pdf
Bram, J (2012). Does Consumer Confidence Forecast Household Expenditure? A Sentiment Index Horse Race.Retrieved on 21st May, from http://www.econ.nyu.edu/user/ludvigsons/698jbra.pdf
BLS (2012).Unemployment rates data. Retrieved on 21st May, from http://data.bls.gov/timeseries/LNS14000000.
ECB (2011).Consumer confidence index as a predictor of consumption.Retrieved on 21st May, from http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1349.pdf
Ludvigson, S. (2004).Consumer confidence and Consumer spending.Journal of Economic Perception. Vol. 18 (2) pp 29 to 50.
St Louis (2012) consumer confidence data, Retrieved on 21st May, from http://research.stlouisfed.org/fred2/series/UMCSENT/downloaddata?rid=91&soid=14.
Ychart (2012).Personal consumption expenditure.Retrieved on 21st May, from http://ycharts.com/indicators/personal_consumption_expenditures.
Zaretsky, A. (2012).How Well Does Unemployment Explain the Low Levels of Consumer Confidence? Retrieved on 21st May, from http://research.stlouisfed.org/econ/zaretsky/unemploy.pdf
