Question

1) Does consumer sentiment foreshadow recessions? What could be the reason?

2) Under the Rational Expectations/Permanent Income Hypothesis, current sentiment should not affect future consumption. Why?

Answer 1

1) Sale of goods and services are always depend on the tastes and preferences of the consumers. The interest of consumers rest with huge sales volume of the goods and services. Apart from good impression of certain products, the customers also have certain sentiment and emotional attraction towards certain goods which have full reputation. Consumer sentiment refers to the economic indicator of how much they are able to use their finance status to spend on purchase of the goods and services. It also known as consumer confidence of buying the products with sufficient monetary support. If it shows the negative effect, then automatically it leads to the situation of recession. The money supply decreases when there is spending and savings habit effects drastically to the lower level. In the recession period, the supply and demand for the goods decreases at the extreme level. So the sentiment or the ability to pay for the goods and services slashed in the recession period due to poor purchasing power of the people. As the rate of production of goods and services decreases as the demand for the goods and services also reduces due to recession period. This can be proved as a reason for consumer sentiment foreshadowing the recession period.

2) Rational Expectations and the Permanent Income Hypothesis are the concepts widely used in the Macro-economic related activities. Usually the production of good and services are always rest on the demand and supply of the goods. It can only active when the consumer have their real judgement of basic wish of purchasing the products which are used in day to day activities such food items and Housing infrastructure and other main needs. Factors of personal information, rational prudence and past experiences should not affect the negative pulse of the customers sentiment of procuring the basic goods and services at the same rate. And also permanent income hypothesis technique also should not act against the positive outcome of the consumers sentiments of tastes and preferences. The long-term budget plan of the consumers always not restricts from the customers to reduce the rate of procuring basic goods and services. Always good justified customers will always use their good sentiment attachment to buy the goods and services by using the stable income they will in the present as well as in the future period without any effects of future consumption.