Borrowing on Belief? Consumer Confidence and U.S. Credit -- A VECM Study

TL;DR

This study uses a VECM to analyze the long-term and short-term relationship between consumer confidence and credit in the U.S., revealing that confidence boosts borrowing and influences credit dynamics over time.

Contribution

It provides the first comprehensive VECM analysis of the interdependence between consumer confidence and credit, accounting for macroeconomic controls.

Findings

Higher consumer confidence correlates with increased credit utilization.

Consumer confidence shocks have sustained positive effects on borrowing.

Credit adjustments exhibit significant inertia and short-term effects are modest.

Abstract

This study explores the interdependent relationship between consumer credit and consumer confidence in the United States using monthly data from January 1978 to August 2024. Utilizing a Vector Error Correction Model (VECM), the analysis focuses on the interplay between household borrowing behaviour and consumer sentiment while controlling for macroeconomic factors such as interest rates, inflation, unemployment, and money supply. The results reveal a stable long-run equilibrium: heightened consumer confidence is associated with increased credit utilization, reflecting greater financial optimism among households. In the short run, shifts in consumer confidence exert relatively modest immediate influence on credit usage, whereas consumer credit adjusts slowly, displaying significant inertia. Impulse-response analysis confirms that shocks to consumer confidence generate sustained positive effects on borrowing, while unexpected increases in credit initially depress sentiment but only fleetingly. These findings underscore the critical role of the relationship between consumer confidence and credit-market dynamics and highlight its policy relevance for fostering balanced and stable household finances.