Bob Barsky Miles Kimball Noah Smith 1

Two Polar Views of Consumer Confidence in Macroeconomics Information Animal Spirits Issues in Cognitive Psychology Effect of affect on judgment Degree of persistence in “happiness shocks”

Confidence shocks reflect genuine news about relevant future variables Link between confidence and economic behavior not causal 3

“Animal Spirits” View Important movements in confidence that are exogenous to the macroeconomy “Confidence shocks” have causal effects on economy

What might “explain” variation in confidence? Do changes in measured confidence reflect information or fluctuations in pure sentiment? Is the relationship between confidence and subsequent economic outcomes causal? What might “explain” variation in confidence? Time-series variation Cross-sectional variation at a point in time Individual innovations in panel data 5

The Index of Consumer Sentiment Pago: “Would you say that you (and your family living there) are better off or worse off financially than a year ago?” Pexp: “Do you think that a year from now you (and your family living there) will be better off financially, or worse off, or just about the same as now?” Bus12: “Do you think that during the next 12 months we’ll have good times financially, or bad times, or what?” Bus5: “Which would you say is more likely – that in the country as a whole we’ll have continuous good times during the next 5 years or so, or that we will have periods of widespread unemployment and depression, or what?” Dur: “Generally speaking, do you think now is a good time or a bad time for people to buy major household items?”

Three Dimensions National vs. Personal Expectations vs. Judgments about the Past and Present Clearly Defined or Not

“Now turning to business conditions in the country as a whole: Do you think that over the next five years we will have mostly good times, or mostly bad times with periods of widespread unemployment and depression, or what?” 8

Time series co-variation in happiness measures and the responses to the various confidence questions How is variation in confidence answers across individuals related to the happiness individual effect? How do changes in each individual’s answer to the confidence questions between the initial interview and the reinterview covary with happiness?

Now think about the past week and the feelings you have experienced Now think about the past week and the feelings you have experienced. Please tell me if each of the following was true for you much of the time this past week: Much of the time during past week, you felt you were happy. (Would you say yes or no?) (Much of the time during the past the week,) you felt sad. (Would you say yes or no?) (Much of the time during the past week,) you enjoyed life. (Would you say yes or no?) (Much of the time during the past week,) you felt depressed. ( Would you say yes or no?) (average survey time=36 seconds)

Negligible Serial Persistence in Daily Average Happiness note: some days have only 1 obs

(Green is Happiness)

Negligible variation even over this long period Strikingly, national mood was not depressed during 1970s “malaise” period nor ebullient in late 1980s or 1990 Celebrated relationship between happiness and inflation, unemployment apparently not first order

Interpretation:

Effect of household income on happiness To get intuition about the likely size of causal effects of changes in expectations on happiness at the 6 month frequency, let’s look at the effect of objective circumstances on happiness at the 6 month frequency. Effect of household income on happiness

National News

Personal News

Econometric Issues for Later Discreteness of the components of the happiness index. Differential sensitivity of the components of the happiness index to the underlying latent variable. Plan: Use an approach similar to Kimball, Sahm and Shapiro, “Imputing Risk Tolerance from Survey Responses” JASA (forthcoming) and NBER 13337

Measurement Model

Component Impulse Responses (National News)

Component Impulse Responses (Personal News)

Measurement Model

Structural Model

Structural Model: Comments

Measurement Model for Happiness Index

Measurement Model for Average Daily Happiness Index of Others NOTE: All components depend on the date because the set of “others” depends on the date.

Identifying N

Identifying N

Persistence of national happiness

Persistence of national happiness

Effect of national happiness

Identifying P 1=1st obs date, 2=2d obs date; cross-question covariance: rq

Identifying P

Identifying P

Identifying P

The Correction Factor for P since and

Covariances of Happiness Responses across Contact Dates [Average of All]/[Average off Diagonal] = 1.07

Identifying T 1=1st obs date, 2=2d obs date

Identifying T 1=1st obs date, 2=2d obs date; cross-question covariance: rq

Identifying T

Identifying T

The Correction Factor for T since and

Covariances of 6-month changes in individual responses to happiness questions Average on Diagonal/Average off Diagonal = 1.400 (Omitting ENJOYLIFE: 1.421)

Bus5 (national, future, ρ= Bus5 (national, future, ρ=.446) “Which would you say is more likely – that in the country as a whole we’ll have continuous good times during the next 5 years or so, or that we will have periods of widespread unemployment and depression, or what?” Persistent Effect: .396 (t=11.26) Transitory Effect: .011 (t=0.57) Bus12 (national, future, ρ=.422) “Do you think that during the next 12 months we’ll have good times financially, or bad times, or what?” Persistent Effect: .243 (t=6.91) Transitory Effect: .066 (t=3.24)

Sticky Expectations? People may not reevaluate their expectations every day. However, being interviewed may trigger the reevaluation of an expectations. If being interviewed does not trigger reevaluation, people can respond from explicit or implicit memory. Today’s happiness should only matter if the expectation is reevaluated, pushing down

Sticky Expectations: A Testable Prediction?

Bus5 (national, future, ρ= Bus5 (national, future, ρ=.446) “Which would you say is more likely – that in the country as a whole we’ll have continuous good times during the next 5 years or so, or that we will have periods of widespread unemployment and depression, or what?” Persistent Effect: .396 (t=11.26) Transitory Effect: .011 (t=0.57) Bus12 (national, future, ρ=.422) “Do you think that during the next 12 months we’ll have good times financially, or bad times, or what?” Persistent Effect: .243 (t=6.91) Transitory Effect: .066 (t=3.24)

Px5q1 (national, future, ρ= Px5q1 (national, future, ρ=.312) “Do you think prices will be higher, about the same, or lower 5 to 10 years from now?” Persistent Effect: -.078 (t= -2.23) Transitory Effect: -.000 (t= -.02) Px1q1 (national, future, ρ=.263) “Do you think that during the next 12 months, prices will go up, or go down, or stay where they are now?” Persistent Effect: .044 (t=1.26) Transitory Effect: .027 (t=1.25)

Gaspx1 (national, future, ρ= Gaspx1 (national, future, ρ=.318) “Do you think that the price of gasoline will go up during the next 5 years, go down, or stay about the same?” Persistent Effect: .025 (t=0.75) Transitory Effect: .006 (t=0.27) Gas1px1 (national, future, ρ=.231) “Do you think that the price of gasoline will go up during the next 12 months, go down, or stay about the same?” Persistent Effect: .022 (t=0.65) Transitory Effect: .020 (t=0.85)

Bexp (national, future, ρ= Bexp (national, future, ρ=.323) “A year from now, do you expect that in the country as a whole business conditions will be better, or worse than they are at present, or just about the same?” Ratex (national, future, ρ=.297) “What do you think will happen to interest rates for borrowing money over the next 12 months – will they go up, stay the same, or go down?”

Unemp (national, future, ρ= Unemp (national, future, ρ=.285) “How about people out of work during the coming 12 months – do you think that there will be more unemployment than now, about the same, or less?” Dur (national, present, ρ=.274) “Generally speaking, do you think now is a good time or a bad time for people to buy major household items?”

Govt (national, present, ρ= Govt (national, present, ρ=.539) “As to the economic policy of the government – I mean steps taken to fight inflation or unemployment – would you say the government is doing a good job, only fair, or a poor job?” Bago (national, past, ρ=.345) “Would you say that at the present time business conditions are better or worse than they were a year ago?”

Conclusions: General The variance and persistence of national happiness are small. Happiness affects expectations causally. Suggestive evidence for sticky expectations - expectations that people would plausibly reevaluate less often seem less affected by changes in happiness.

Conclusions: Animal Spirits vs. Information Upper bound on the size of business cycle fluctuations that are caused by structural shocks to the emotion of happiness. Bad for the “animal spirits” view Happiness does seem to affect expectations, but happiness is mostly idiosyncratic. Leaves plenty of room for the empirical successes of the information view based on aggregate data.

Inexq1 (personal, future, ρ= Inexq1 (personal, future, ρ=.416) “During the next 12 months, do you expect your (family) income to be higher or lower than during the past year?” Pexp (personal, future, ρ=.419) “Do you think that a year from now you (and your family living there) will be better off financially, or worse off, or just about the same as now?”

Pago (personal, past, ρ=.462) “Would you say that you (and your family living there) are better off or worse off financially than a year ago?” V228 (personal, past, ρ=.429) “Compared with 5 years ago, do you think the chances that you (and your husband/wife) will have a comfortable retirement have gone up, gone down, or remained about the same?”

Homeval (personal, past, ρ= Homeval (personal, past, ρ=.580) “Do you think the present value of your home – I mean what it would bring you if you sold it today – has increased compared with a year ago, decreased, or stayed about the same?” Hom (personal, present, ρ=.361) “Generally speaking, do you think now is a good time or a bad time to buy a house?”

Car (personal, future, ρ= Car (personal, future, ρ=.286) “Do you think the next 12 months will be a good time or a bad time to buy a vehicle?”