Working Paper: NBER ID: w27010
Authors: Mark Garmaise; Yaron Levi; Hanno Lustig
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 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. Households in treated areas act as if they are more financially constrained than those in untreated areas with the same fundamentals.
Keywords: household consumption; macroeconomic news; unemployment announcements; consumer behavior; financial constraints
JEL Codes: D12; G4; G51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| announcement of a 12-month maximum in the local unemployment rate (J68) | reduction in discretionary spending (H61) |
| announcement of a 12-month maximum in the local unemployment rate (J68) | reduction in credit card repayments (G51) |
| reduction in discretionary spending (H61) | longer-term impact on consumer sentiment and spending behavior (D12) |
| announcement of a 12-month maximum in the local unemployment rate (J68) | behavioral response to salient economic news (E71) |
| low-income households (R20) | greater sensitivity to announcements (G14) |
| steady release of adverse economic news (E66) | consumption declines (E21) |