Consumer signals

Consumers' expenditures reflect their information about employment opportunities, likely future real wage growth, and investment opportunities, as well as current wealth and income. Real, total consumption growth deviations from normal stock market wealth effects lead economic growth in advanced economies in the Americas, in Europe and in AustralAsia. Previous research showed that stock prices and the slope of the term structure of interest rates reflect forecasted economic growth. In this applied article, it is shown that consumer spending deviations improve upon the signals given by the term structure and stock returns, and the combined readings of the 'Stocks, Bonds and Consumers Leading Index' of Breeden (2014) are quite competitive with more complex widely used indexes of leading economic indicators published by the Conference Board and the Organization for Economic Cooperation and Development. The simplicity and intuition of the stocks, bonds, consumers model makes it quite a helpful structure to think about country by country likely future economic growth, which should be of use to investors, businesses, nonprofits and government entities. Consumer signals for 17 'Trillion Dollar Economies' are presented, showing movements in consumer signals throughout the Great Recession and the Sovereign Debt Crisis.

Duke Scholars

Author Douglas T. Breeden Fuqua School of Business