Business confidence is a leading indicator for growth - empirics.
Hashmat Khan 19. Full professor and co-director of Carleton University’s Centre for Monetary and Financial Economics, with Santosh Upadhayaya. “Does business confidence matter for investment?” Empirical Economics volume 59, pages1633–1665 (2020). https://link.springer.com/article/10.1007/s00181-019-01694-5
Despite the popularity of business confidence as a leading indicator of future output, the direct link between the former and business investment has not yet been investigated. Our paper fills this gap in the literature. Using quarterly US data for over sixty years, we investigate whether confidence predicts business investment, and whether confidence can forecast investment downturns and the direction of investment growth. We find that business confidence leads US business investment growth by one quarter, and structures by two quarters; and business confidence has predictive ability for investment growth even after controlling for conventional factors such as output, user costs, cash flows, and stock prices. Business confidence has a superior predictive power, relative to traditional factors, for investment downturns over 1–3-quarter forecast horizons and direction of investment growth over 2-quarter forecast horizons in the US economy. Impulse response analysis reveals that exogenous shifts in business confidence reflect short-lived non-fundamental factors, consistent with the ‘animal spirits’ view of investment. Our findings have implications for improving investment forecasts, developing new business cycle models, and studying the role of behavioural factors determining investment growth.