Spending Less After (Seemingly) Bad New

Spending Less After (Seemingly) Bad New

By Mark J. Garmaise, Yaron Levi, Hanno Lustig
October 17,2019Working Paper No. 3830

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%.