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Spending Less After (Seemingly) Bad News

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 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%. Households in treated areas act as if they are more financially constrained than those in untreated areas with the same fundamentals.

Mark Garmaise
Yaron Levi
Hanno Lustig
Publication Date
April, 2020