Explaining US Consumer Behavior and Expectations with News Sentiment

Abstract

We examine the information content of a newly created news sentiment index from over 300,000 articles from some of the most widely read newspapers in the US to explain changes in the University of Michigan Index of Consumer Sentiment from 1995 to 2009. Using ARMA-models, we show that consumer expectations and sentiment are influenced by news sentiment and other variables, such as personal income and inflation. While there exists a statistically significant relationship between news sentiment and private consumption, the consumption behavior of private households can best be explained by consumer expectations and sentiment combined with changes in personal income, inflation and interest rates. We ad news sentiment to the causality chain before consumer expectations and sentiment and private consumption