Consumer Durable Spending: Explanation and Prediction

Abstract

IN AN EARLIER PAPER presented to the Brookings Panel on Economic Activity, I attempted to survey the extent to which recent consumer behavior would have been understood by some of the principal U.S. forecasting models in the absence of concurrent errors emanating from other sectors of the economy.' At that time, I concluded that the errors in forecasting that reflected most seriously on the structure and composition of the typical forecasting equations concerned consumer durable expenditures, particularly for automobiles. An attempt to improve the explanatory power and forecasting ability of a stock-adjustment automobile equation by incorporating a household wealth variable was notably unsuccessful. The analysis reported in the present paper stems from the findings in the earlier report. The concentration here is on consumer durables, especially automobiles. While the wealth variable has been abandoned for the present, its prime mover-the stock market-continues to play a significant role in the investigation, both directly, and indirectly as a possible source of changes in consumer sentiment. In the majority of econometric consumption equations in standard use as forecasting tools, variables directly reflecting consumer sentiment play