Spending Less After (Seemingly) Bad News

Mark J. Garmaise, Yaron Levi and Hanno Lustig
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Mark J. Garmaise: UCLA Anderson
Yaron Levi: USC Marshall
Hanno Lustig: Stanford GSB

Research Papers from Stanford University, Graduate School of Business

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%.

Date: 2019-10
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