Consumer confidence, disposable income, and recessions Go to the Web site of the FRED economic data base and download the quarterly series for real personal disposable income per capita (series name A229RXOQ048SBEA (billions of chained 2012 dollars)), the University of Michigan Survey of Consumers Index of Consumer Sentiment (series UMCSENT)). The Consumer Sentiment data are monthly and you will need to create a quarterly average from the monthly observations by averaging. We will use this data series as our measure of consumer confidence. The monthly observations start in January 1978, so begin your study at that date.

a. Before you look at the data, can you think of any reason to expect consumer confidence to be related to disposable income? Can you think of reasons why consumer confidence would be unrelated to disposable income?

b. Plot the level of the index of consumer sentiment against the growth rate of disposable income per person. Is the relationship positive?

c. Plot the change in the index of consumer sentiment against the growth rate of disposable income per person. What does that relation look like? Focus on observations where the change in disposable income is less than \(0.2 \%\) in absolute value. Is the level of consumer sentiment changing? How would we interpret such observations?

d. Focus on the years 2007, 2008, and 2009. How does the behavior of consumer sentiment from 2007 to 2008 compare to the usual behavior in consumer sentiment? Why? (Hint: The bankruptcy of Lehmann Brothers occurred in September 2008.) Does the fall in consumer sentiment anticipate the decline in real personal disposable income that accompanied the crisis?

e. Donald Trump was rather unexpectedly elected President in November 2017. Is there any evidence of a change in consumer confidence in the first quarter of 2017?

f. There was a large tax cut, signed into law on December 22, 2017 and implemented in 2018. Is there a substantial change in personal disposable income per capita from 2017 to 2018? Is there a change in the index of consumer sentiment between 2017 and 2018?