Consumers' Sunspots, Animal Spirits, and Economic Fluctuations

Multiple-equilibria macroeconomic models suggest that consumers' and investors' perceptions about the state of the economy may be an important independent factor for business cycles. In this paper, we verify empirically the interrelations between waves of optimism and pessimism and subsequent economic fluctuations. We focus on the nonlinear behavior of non-fundamental movements in consumer sentiment, as a proxy for consumer's sunspots, and in business formation, representing animal spirits, around economic turning points. We find that bearish consumers and entrepreneurs are present before the onset of some U.S. economic downturns, even when the fundamentals are all very strong. In particular, our analysis suggests that waves of pessimism may have played a nontrivial role for the 1969-70 recession and slowdown, the 1981-82 recession, and the 1984-87 slowdown. The results are robust to a range of alternative linear and nonlinear specifications. Our evidence provides empirical support for the role of sunspots in multiple-equilibria macroeconomic models.