Spending Less After (Seemingly) Bad News
42 Pages Posted: 28 Oct 2019
Date Written: October 17, 2019
We show that household consumption displays excess sensitivity to salient macro-economic news. When the announced local unemployment rate reaches a 12-month maximum, local consumers in that area reduce 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. Announcements of 12-month unemployment maximums also lead consumers to reduce their credit card repayments by 3.6%.
Keywords: Household consumption, consumer sentiment, excess sensitivity of consumption
JEL Classification: D03, D12, E21, G02
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