Abstract
Consumers’ expenditures reflect their information about employment opportunities, likely future real wage growth, and investment opportunities, as well as current wealth and income. Real, total consumption growth deviations from normal stock market wealth effects lead economic growth in advanced economies in the Americas, in Europe and in AustralAsia. Previous research showed that stock prices and the slope of the term structure of interest rates reflect forecasted economic growth. In this applied article, it is shown that consumer spending deviations improve upon the signals given by the term structure and stock returns, and the combined readings of the ‘Stocks, Bonds and Consumers Leading Index’ of Breeden (2014) are quite competitive with more complex widely used indexes of leading economic indicators published by the Conference Board and the Organization for Economic Cooperation and Development. The simplicity and intuition of the stocks, bonds, consumers model makes it quite a helpful structure to think about country by country likely future economic growth, which should be of use to investors, businesses, nonprofits and government entities. Consumer signals for 17 ‘Trillion Dollar Economies’ are presented, showing movements in consumer signals throughout the Great Recession and the Sovereign Debt Crisis.
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Acknowledgements
This article is based on the working paper ‘A Stocks, Bonds, Consumers Leading Index (SBCLI)’, which can be found at the following Webpage: www.dougbreeden.net/uploads/Breeden_SBCLI_applied_paper_April_22_2012.pdf. The author would like to thank Lina Ren, Jonathan Ashworth, LiAn Pan, Mark Breeden, Yeonkyo Choi, Tingyan Jia and Chloe Peng for research assistance during this project.
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1PhD, is distinguished Professor and former Dean of Duke’s Fuqua School. He taught on Chicago and Stanford faculties and was Fischer Black Visiting Professor at MIT. He published seminal research on the Consumption CAPM, insurance prices in options, and on mortgages. His research (with Robert Litzenberger) ‘Central Bank Policy Impacts on Future Interest Rates’, won the 2014 Q-Group Roger Murray Prize. He was Associate Editor of 5 journals, Editor of the Journal of Fixed Income, on the American Finance Association Board and lifetime Fellow. The IAQF named Breeden ‘Financial Engineer of the Year 2013’ as ‘industry pioneer.’ He has a PhD from Stanford, and an S.B. from M.I.T. Member, Commonfund Board, and Co-founder, Senior Research Consultant for Amundi Smith Breeden.
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Breeden, D. Consumer signals. J Asset Manag 17, 244–263 (2016). https://doi.org/10.1057/jam.2016.17
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DOI: https://doi.org/10.1057/jam.2016.17