The Political (and Economic) Origins of Consumer Confidence

Abstract

Economic conditions, the story usually goes, influence consumer confidence, which in turn influences both political evaluations and votes. But we have little sense of the origins of consumer confidence itself. It is generally assumed that monthly reports of the nation's level of consumer confidence respond to objective economic conditions. We argue that politics is important for understanding consumer sentiment beyond what we know from economic conditions. Specifically, we demonstrate a direct effect of political evaluations of the president's management of the economy, the party of the president, extraordinary political events, and monetary policy, as well as an indirect effect of media coverage of the economy, on consumer sentiment, after controlling for economic conditions. When news coverage is positive, citizens give favorable evaluations, leading to more positive sentiment. Our findings suggest that understanding the political economy requires an emphasis on the causal effect of politics as well as economics.