Comment for Surveys and Forecasts Session

Claudia R. Sahm

Federal Reserve Board

May 13, 2008

Micro Survey Data Can Inform Macroeconomic Forecasts

• Test behavioral models and aid in interpreting forecasts

• Add covariates to forecast models, such as, consumer or business sentiment

• Calibrate special factors, such as tax rebate spending propensities

Example: Tax Rebate Question

• Spend Less: Precautionary motives

• Spend More: Liquidity constrained

Consumers are markedly more pessimistic now than in 2001, so should we expect them to spend more or less of the current rebates than in 2001?

Empirical question which effect dominates…

Index of Consumer Sentiment

60

70

80

90

100

110

Jan-01 Jan-02 Jan-03 Jan-04 Dec-04 Dec-05 Dec-06 Dec-07

• Sentiment is 20+ points lower than before 2001 rebates

• More pessimistic about personal and business conditions

Survey Question

This year (it is likely that) tax rebates will be mailed to most individuals. In most cases, the tax rebate will be $600 for individuals and $1200 for married couples. Those with dependent children will receive an additional $300 per child. Individuals earning more than $75,000 and married couples earning more than $150,000 will get smaller tax rebates or no tax rebate at all.

Thinking about your (family’s) financial situation this year, will the tax rebate lead you mostly to increase spending, mostly to increase saving, or mostly to pay off debt?

Previous Research

• 1992: Shapiro and Slemrod (AER 1995)• 2001: Shapiro and Slemrod (AER 2003)• 2003: Coronado, Lupton, Sheiner (WP 2005)

Similar questions by Shapiro and Slemrod on the Reuters/UM Surveys of Consumers for 1992 tax withholding change, 2001 rebates and tax cuts, and 2003 child tax credits and withholding

Rebate Plans in 2008

Plan for Rebate 2008 2001Spend 20 22Save 31 32Pay off Debt 49 46Total Responses 1,447 1,444 % No Rebate 7 15Consumer Sentiment 67.7 85.3

% of Recipients

Note: Author's tabulation for February to April 2008 surveys. Shapiro and Slemrod's (2003) tabulations for August to October 2001. All statistics weighted and exclude individuals who report that they will not receive a rebate or do not report a spending/saving plan.

Relationship with Sentiment

Spend Pay off Debt SaveSentiment / 10 0.010 -0.014 0.004

(0.002) (0.004) (0.003)

Percent with Response

Note: Author's tabulation of 2008 responses. Each column is a weighted linear probability model that includes a constant term. Estimates in bold statistically different from zero at 5%

• Large differences in total sentiment associated with small effects on rebate plans

• Patterns differ within economic saving• Subcomponents tell a richer story

Data Interpretation Issues

• Difficult to assess the counterfactual– Use cognitive interviews, survey methods

• Difficult to map to economic theory– Data is “endogenous” can add questions

• Intentions may differ from actual behavior– Survey pre- and post- rebate receipt– Follow-up questions to clarify plan

Appendix: ICS Questions

• Would you say you (and your family living there) are better off or worse off financially than you were a year ago?

• 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?

• Now turning to business conditions in the country as a whole -- do you think that during the next 12 months we’ll have good times financially, or bad times, or what?

• Looking ahead, 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’ll have periods of widespread unemployment or depression, or what?

• Generally speaking, do you think now is a good time or bad time for people to buy major household item?

See Reuters/UM Surveys of Consumers website for more details.