The influence of macro-financial conditions on consumer spending through sentiment

This paper examines the dynamic interrelationships between U.S. financial conditions, consumer sentiment, and consumer spending. Using monthly data from January 2007 to July 2024, we employ autoregressive distributed lag (ARDL) modeling, bootstrapped mediation analysis, and vector autoregression (VAR) techniques to investigate both the direct effects of financial conditions on consumer spending and the indirect influence mediated through consumer sentiment. Our ARDL results confirm a significant long-run cointegrating relationship among these variables, while bootstrapped mediation analysis reveals that approximately 21–24% of the total effect of financial conditions on consumer spending operates through changes in consumer sentiment. VAR analysis demonstrates that financial conditions Granger-cause both sentiment and spending, while variance decomposition indicates that financial conditions emerge as an increasingly important driver of sentiment and consumption over time. These insights into the relationship between macro-financial conditions and consumption expenditures highlight the necessity for policymakers to integrate both financial and psychological drivers in macroeconomic assessments. Furthermore, the findings reveal how traditional policy frameworks that neglect sentiment transmission channels may fundamentally misdiagnose the timing, magnitude, and persistence of economic fluctuations during periods of financial instability. JEL Codes C32, E21, E44, E71