RDP 2016-10: The Effect of Consumer Sentiment on Consumption 2. Consumer Sentiment and Partisanship

2.1 Consumer Sentiment

The Westpac-Melbourne Institute Survey of Consumer Sentiment in Australia is modelled on the Thomson Reuters/University of Michigan Surveys of Consumers in the United States. However, the Australian survey is unique in asking respondents who they would vote for at a federal election. To measure sentiment, each month respondents are asked about:

1. their current personal financial situation compared to a year ago
2. the expected change in their personal financial situation over the year ahead
3. the expected change in economic conditions over the year ahead
4. the expected change in economic conditions over the next five years.

Individual responses for each question are classified as either positive, unchanged/don't know, or negative. An index for each question is constructed by subtracting the proportion of negative responses from the proportion of positive responses, and then adding 100. A value of 100 indicates a neutral economic outlook, with the fraction of negative responses equal to the fraction of positive responses. Each question asks about the change rather than the level of economic conditions, and so is a stationary variable; each index has averaged close to 100 since the inception of the survey. The survey is nationally representative and has a sample size of about 1,200 each month (compared to 500 for the Michigan Surveys of Consumers).^[2]

For each of the four questions outlined above, we construct an index separately for ALP and Liberal/National voters, and the difference (ALP minus Liberal/National voter sentiment) is shown in Figure 3. For each question, consumers report more positive responses when the political party they would vote for holds office federally. Notably the relative change in sentiment occurs in the month of an election when there is a change of government. This change in sentiment around a change in government is sharp, with there being a 2.5 standard deviation movement on average for the series relating to personal finances and a larger 4.5 standard deviation movement on average for the series relating to economic conditions. These large movements in sentiment around a change of government support using partisanship as a way to identify the effect of the sentiment on consumption. We find it hard to think of any changes in current or past consumption fundamentals that could consistently move sentiment by this much during the month of an election. We show later that differences in sentiment between these two groups of voters remain even after controlling for differences in the economic and demographic characteristics of voters.

As an aside, an entirely separate survey provides corroborating evidence that partisanship affects economic beliefs. A semi-annual Newspoll survey published in The Australian newspaper asks a randomly selected sample of voters whether they expect their standard of living to improve, stay the same, or get worse over the next six months. Figure 4 shows indices for ALP and Liberal/National voters, constructed using the same methodology as the consumer sentiment survey. Respondents are relatively more optimistic about their standard of living when the political party they support holds office federally.

2.2 Partisanship and Economic Beliefs

The idea that partisanship affects consumers' beliefs is not unique to the Australian data. In the political science literature, there is a large amount of survey-based evidence that voters are more likely to hold positive views about economic conditions if their partisanship matches that of the President or party in government (e.g. Wlezien, Franklin and Twiggs 1997; Bartels 2000, 2002; Evans and Andersen 2006; Gerber and Huber 2009). Some of the most striking evidence comes from Bartels (2002), who analysed responses to the 1988 American Election Studies survey, which asked: ‘Would you say that compared to 1980, the level of unemployment in the country has gotten better, stayed the same or gotten worse?’ A similar question was asked about inflation. A Republican, Ronald Reagan, was the President during this eight-year period, during which the unemployment rate fell by around 1.5 percentage points and inflation fell by close to 10 percentage points. Bartels found a strong relationship between beliefs about how the economy evolved during Reagan's Presidency and respondents' partisanship: only 30 per cent of respondents identifying as ‘strong’ Democrats said that unemployment had improved since 1980, compared with more than 80 per cent of ‘strong’ Republicans. Similarly, only about 20 per cent of strong Democrats said that inflation was better (lower) than in 1980, compared with 70 per cent of strong Republicans.

Although the political science literature provides clear evidence that partisanship acts as a prism through which people perceive economic conditions, there has been little testing of whether the beliefs expressed in surveys influence economic behaviour. The political science literature has noted that survey respondents may engage in partisan ‘cheerleading’ when answering survey questions. Hence survey responses may be an inaccurate indicator of actual behaviour (Lau, Sears and Jessor 1990). More generally, the attitudes expressed in surveys may differ from the considerations consumers bring to mind when making spending decisions. An important contribution of this paper is to test for a relationship between survey responses and consumption behaviour.

2.3 Conditional Consumer Sentiment Indices

The large movements in consumer sentiment following an election with a change of government indicate that the variation in sentiment we will exploit is unlikely to be related to past or current economic fundamentals. This is further supported by the political science literature which finds that partisanship affects an individual's outlook for the economy. However, a concern is that the movement in sentiment observed around a change of government reflects expected changes to tax and transfer policies made by the incoming government that differentially affect government and opposition party supporters. That is, the government may enact policies that favour its supporters. Given that policy set by the federal government cannot be targeted to specific individuals, but rather to groups of people (based on, for example, their age, occupation or income), we address this concern by controlling for observed economic and demographic differences between ALP and Liberal/National voters. In particular, using economic and demographic information collected from respondents in the consumer sentiment survey, we construct sentiment indices for ALP and Liberal/National voters that condition on individual-level economic and demographic characteristics.

We assume that the categorical responses to the consumer sentiment questions (positive, unchanged/don't know, or negative) mask a smooth underlying distribution of consumer sentiment. For each sentiment question, and each survey month, we fit an ordered probit model:

where is the latent sentiment of consumer i in response to question j in survey month t, ALP_i is a dummy variable if consumer i identifies as an ALP voter, ϕ_j,t is the coefficient on the ALP dummy variable, and ε_i,j,t is a normally distributed error term.^[3] X_it is a vector of covariates for consumer i, capturing an individual's age, income, gender, occupation, education, home ownership status and whether they live in a metropolitan or non-metropolitan area. Γ_j,t is the vector of coefficients on those covariates in month t. Negative responses are assumed to correspond to levels of the latent sentiment variable below the threshold , positive responses correspond to levels of the latent sentiment variable above the threshold , and unchanged/don't know responses to levels of the latent sentiment variable between these two thresholds. Thus, the probability that consumer i reports a positive response to question j in survey month t is

and analogously for the other two responses. The thresholds and and the coefficients ϕ_j,t and Γ_j,t are jointly estimated using maximum likelihood, under the identification constraints that the error term, ε_i,j,t, has unit variance and the regression omits a constant term. Observations are weighted by their sampling frequency, ω_t. Because Γ_j,t is estimated separately by survey month we control for the possibility that changes in government policy directed to particular demographic groups alter the relationship between the demographic variables and consumer sentiment.

We are interested in the effect of partisanship on consumer attitudes. The estimated average difference in the probability of reporting a positive response to question j in month t between an otherwise similar ALP voter and a Liberal/National voter is

and similarly for negative responses,

Subtracting Equation (4) from Equation (3), and rearranging gives:

The first term on the right-hand side of Equation (5) is the probability for an ALP voter of reporting a positive response less the probability of reporting a negative response; the second term is the same for Liberal/National voters. Each term mirrors the published sentiment indices, which are constructed by subtracting the fraction of negative responses from positive responses. Thus, estimates of Equation (5) provide conditional analogues to the raw sentiment indices.

The conditional estimates for each expectations question in the sentiment survey are shown in Figure 5 and are similar to the unconditional estimates, shown in Figure 3. Thus the difference in responses between ALP and Liberal/National voters remain even after controlling for differences between voters. This provides evidence that shifts in sentiment are unlikely to be driven by expected changes in tax or transfer policy, which are likely to be related to observable differences between voters.

Footnotes

The aggregate consumer sentiment index is constructed by averaging responses to these four questions as well as responses to a question asking about whether it is a good time to purchase a major household item. We view this latter question as representing an outcome variable as it measures spending intentions. We discuss the spending intentions question in more detail in Section 4.1. [2]

The estimated equation includes dummy variables for consumers who identify as minor party voters, which for brevity are not reported here. Effects are relative to the baseline of a Liberal/National voter. [3]