Is Consumer Sentiment Index Useful in Predicting Household Consumption? A Directional Analysis with Korean Data*

This paper examines whether the consumer sentiment index (CSI) in Korea is useful in forecasting household consumption. The methodology used is a directional analysis which tests the predictability of the CSI on the direction of changes in consumption. The direction of changes in consumption is considered as either positive versus negative growth or high versus low growth. The study finds that the CSI has little explanatory power for the direction of future consumption changes in Korea. However, the sentiment index is closely related to current period consumption variations. The CSI in Korea seems to have a limited value that can be used as an indicator of current consumer behavior. This paper also finds that the individual expectation indexes included in consumer surveys do not provide useful information on future consumption changes. JEL Classification: D1