Spending Less After (Seemingly) Bad News

42 Pages Posted: 28 Oct 2019

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)

Date Written: October 17, 2019

Abstract

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

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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