Four Leading Economic Confidence Measures: Whose Optimism Matters?

FOUR LEADING ECONOMIC CONFIDENCE MEASURES: WHO’S OPTIMISM MATTERS? By G. Michael Phillips Compares predictability of four commonly used measures of economic activity … uses ‘Granger Causality Test’ to determine the quality of their predictive power … the Index of Small Business Optimism is the best predictor. Although a quick scan of the Internet reveals the existence of dozens of indexes measuring “confidence” and “optimism” for various special sectors, there are four dominant measures, which are frequently discussed by policymakers and the press. As it happens, three of these are sponsored opinion indexes and the fourth is a sponsored stock market index. Because the indexes represent different slices of the American experience, ranging from top CEOs to soccer moms, one would not assume that each would have the same predictive power with respect to the overall economy. But, which one is best? Do these “opinion” indices even have any relation to the overall U.S. economy? That’s what this article explores. We will first describe the four indexes, and then describe tests we performed to determine which one matters. MEASURES OF OPTIMISM AND CONFIDENCE ...