Consumer Sentiment and the Expansion and Contraction of Real GDP

This Activity Exercise is appropriate for Principles of Macroeconomics, has no class size limitations, and is designed for completion in one 50 minute class period. The preparatory work can also be captured and evaluated by the instructor. It is the second in a sequence of five Activity Exercises designed by the author to explore basic macroeconomic principles and their measurement. The five Activity Exercises are: Unemployment Rate (1), Consumer Sentiment (2), Gross Private Domestic Investment Spending (3), Housing Starts Leading Indicator (4), and Investment Spending Multipliers (5).

Overview

The Activity Exercise Consumer Sentiment and the Expansion and Contraction of Real GDP can be used as an applied exercise for exploring the determinants of Personal Consumption spending. Ideally, preparation for the Activity Exercise will familiarize students with the importance of psychology in the spending habits of consumers. The Activity Exercise asks students to apply that understanding to a specific case where business cycle considerations will effect product sales, income, and the level of employment.

Instructor can elect to lead students through the process of creating the appropriate FRED chart, or have students perform that to submit as a prep exercise. See "10 FRED Activities in 10 Minutes," Mark Bayles, Federal Reserve Bank of St. Louis, 2016 ( This site may be offline. )

Expected Student Learning Outcomes

At the completion of this Activity Exercise, students will be able to describe the relationship between values for the University of Michigan Index of Consumer Sentiment and expansionary and contractionary phases in the growth of the American economy.

Information Given to Students

You've taken a job as the chief macroeconomic advisor in a $100 million start-up firm. As your firm's business plan is launched, and sales immediately surge, the 28 year old CEO expresses concern that sales of her product are vulnerable to economic downturns. She asks, "Do you think Consumer Sentiment regarding the overall health of the economy contributes to upturns and downturns in Consumer Spending?"

You respond:

A. "Since 1990, a sharp decrease in Consumer Sentiment appears to be directly related to recessionary phases in the business cycle, and we should be worried...VERY worried about the survival of our firm when Consumer Sentiment trends downward."
B. "Since 1990, there have been no increases of Consumer Sentiment, so firm is always threatened."
C. "Since 1990, decreases in Consumer Sentiment have no role whatsoever in recessions, so we should expect our sales to grow."
D. "There's no relationship between Consumer Sentiment and economic growth. And BTW, thanks for hiring me!"

Consumer Sentiment and the Expansion and Contraction of Real GDP (Microsoft Word 2007 (.docx) 118kB Jul16 18)

Instructor can elect to lead students through the process of accessing the University of Michigan Consumer Sentiment Index, or have students perform that as a prep exercise.

Instructor can elect to lead students through the process of creating the appropriate FRED chart, or have students perform that to submit as a prep exercise. See "10 FRED Activities in 10 Minutes," Mark Bayles, Federal Reserve Bank of St. Louis, 2016. https://www.stlouisfed.org/~/media/Education/Lessons/pdf/10-FRED-Activities-in-10-Minutes.pdf?la=en.

Instructor should note how shaded areas in FRED chart indicate contractionary phases in the growth of the American economy.

A. Is the correct answer.

B. Is not true.

C. Is counter-intuitive to decreases in Consumer Sentiment, and not true.

D. Is not true.

Suggested Debriefing Discussion Questions:

Why is Consumer Sentiment important in determining whether Consumer
spending is increasing or decreasing?
What is the relationship between changes in Consumer spending and the
expansion or contraction of growth in the American economy?
Are changes in the Michigan Consumer Sentiment Index a leading indicator of
whether the growth of the American economy is changing from a period of
expansion to one of contraction?
Are changes in the Michigan Consumer Sentiment Index a leading indicator of
whether the growth of the American economy is changing from a period of
contraction to one of expansion?
With regard to influencing the behavior of consumers, what other factors might
contribute to broad changes in their spending habits?

Students should be able to articulate how changes in consumer sentiment are both causes and effects of changes in real GDP. Instructor evaluation can be formulated through formal examination questions or presentation.

PREP ASSIGNMENT (may be submitted in advance):

Access the University of Michigan Index of Consumer Sentiment, online.

Click on the Reports tab and read the "Final Results" for the most recent month.

Click on the Survey Information tab

Now click on the Survey Description link, and read the full document
Instructions for accessing and manipulating FRED data are found in "10 FRED Activities in 10 Minutes," Mark Bayles, Federal Reserve Bank of St. Louis, 2016 ( This site may be offline. )

Access the FRED chart of data for the University of Michigan Index of Consumer Sentiment (UMCSENT)

Save the completed chart for future reference.