Consumer confidence and economic activity: a factor augmented VAR approach

Abstract

This study aims to analyse the effects of the consumer confidence on economic activity for the USmarket. We use the empirical factor-augmented vector autoregression (FAVAR) method, whichenables us to incorporate a wide range of economic activity factors into the analysis. Theconsumer confidence index (CCI) is chosen as the principal variable that is presumed to representthe degree of optimism on the state of economic activity. The results show that consumerconfidence and economic activity are strongly correlated for manufacturing-related factors,such as industrial production and inventories. We also observe strong relation among CCI andpersonal consumption expenditures, as well as housing market variables.