Business confidence is a well-known leading indicator of future output. Whether it has information about future investment is, however, unclear. We determine how informative business confidence is for investment growth independently of other variables using US business confidence survey data for 1955Q1{2016Q4. Our main findings are: (i) business confidence leads US business investment growth by one quarter, and structures investment by two quarters; (ii) business confidence has predictive ability for investment growth; (iii) remarkably, business confidence has superior forecasting power, relative to conventional predictors, for investment downturns over 1{3 quarter forecast horizons and for the sign of investment growth over a 2-quarter forecast horizon; and (iv) 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 social and psychological factors determining investment growth.

Additional Metadata
Keywords Business confidence, Investment, Forecasting, Downturns, Directional forecasts
JEL Time-Series Models; Dynamic Quantile Regressions (jel C32), Capital; Investment (including Inventories); Capacity (jel E22), Business Fluctuations; Cycles (jel E32), Forecasting and Simulation (jel E37)
Publisher Department of Economics
Series Carleton Economic Papers (CEP)
Citation
Khan, H.U, & Upadhayaya, Santosh. (2018). Does Business Confidence Matter for Investment? (No. CEP 17-13). Carleton Economic Papers (CEP). Department of Economics.