Spending Less After (Seemingly) Bad News
49 Pages Posted: 28 Oct 2019 Last revised: 23 Jul 2020
Date Written: October 17, 2019
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: Suggested Citation