Spending Less After (Seemingly) Bad News

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 1.5% 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 followed by above-average spending in subsequent 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