Spending Less After (Seemingly) Bad News

49 Pages Posted: 28 Oct 2019 Last revised: 23 Jul 2020

See all articles by Mark J. Garmaise

Mark J. Garmaise

University of California, Los Angeles (UCLA) - Anderson School of Management

Yaron Levi

University of Southern California - Marshall School of Business

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

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Date Written: October 17, 2019

Abstract

Using high-frequency spending data, we show that household consumption displays excess sensitivity to salient macro-economic news, even when the news is not real. When the announced local unemployment rate reaches a 12-month maximum, local news coverage of unemployment increases and local consumers reduce their discretionary spending by 2% relative to consumers in areas with the same macro-economic fundamentals. The consumption of low-income households displays greater excess sensitivity to salience. The decrease in spending is not reversed in subsequent months; instead, negative news persistently reduces future spending for two to four months. Households in treated areas act as if they are more financially constrained than those in untreated areas with the same fundamentals.

Keywords: Household consumption, consumer sentiment, excess sensitivity of consumption

JEL Classification: D03, D12, E21, G02

Suggested Citation

Garmaise, Mark J. and Levi, Yaron and Lustig, Hanno N., Spending Less After (Seemingly) Bad News (October 17, 2019). Available at SSRN: https://ssrn.com/abstract=3471565 or http://dx.doi.org/10.2139/ssrn.3471565

Mark J. Garmaise

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Yaron Levi (Contact Author)

University of Southern California - Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

Hanno N. Lustig

Stanford Graduate School of Business ( email )

Stanford GSB
655 Knight Way
Stanford, CA California 94305-6072
United States
3108716532 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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