A new study from the Money Anxiety Index (moneyanxietyindex.com) reveals that consumers follow a pattern of saving and spending based on their level of financial anxiety.  The study shows that when the money anxiety level is high, scared consumers tend to increase their savings and cut down on spending.  Conversely, when the level of money anxiety is low, consumers feel more financially safe and they tend to increase their spending and reduce savings. 

The latest demonstration of the link between consumers’ level of money anxiety and their spending habits is evident in the December retail sales report, which shows an increase of 0.2 percent over the November, and 4.1 percent over the same month last year.  The increase in retail sales mirrors the Money Anxiety Index, which shows a gradual decrease of 13.1 in the level of consumers’ financial anxiety during 2013.

Consumers’ tendency to hoard money during times of high money anxiety is evident in the comparison between the pre and post Great Recession years.  During the two recessionary years of December 2007 to December 2009, consumers increased their pace of bank savings by $100 billion compared to the two years prior to the Great Recession.  According to FDIC data, domestic deposits grow by $700 billion from December 2005 to December 2007, were as the growth in deposits increased to $800 billion during the recessionary period of December 2007 and December 2009.

The link between consumers’ financial anxiety and their spending habits has been empirically demonstrated in a new behavioral economics book - Money Anxiety, which shows strong association between consumers’ level of financial anxiety and personal consumption and expenditure.  When money anxiety increases, consumers save more and spend less, which pushes the economy into a recession. Conversely, when money anxiety decreases, consumers save less and spend more, which expands the economy.
Human nature has not changed since day one - our ancestors hoarded food and wood when they were scared, and we do the same with our money.
 
 
The decrease of 3.1 points in the Money Anxiety Index (moneyanxietyindex.com) in December prompted an increase of 0.2 percent in retail sales for December as less financially anxious consumers spent more than they did in November.  Moreover, December’s retail sales increased 4.1 percent over December of 2012 according to the data released by the U.S. Department of Commerce.  The December increase in retail sales of 0.2 percent over the previous month and 4.1 percent over the same month last year mirrors the Money Anxiety Index, which shows a gradual improvement in the level of consumers’ financial anxiety starting January of 2013.

The increase in December’s retail sales occurred across multiple categories with food and beverages, clothing, and non-store retailers gaining the most.  Such broad-based increase in sale categories indicates that consumers are less financially anxious, and they are staring to spend more than they did in the previous month and in the previous year.  Additionally, this is an indication that the increase in retail sales was well distributed, and was not influenced by one single category of products.

The link between consumers’ financial anxiety and their spending habits has been empirically demonstrated in a new behavioral economics book - Money Anxiety (moneyanxiety.com), which shows strong association between consumers’ level of financial anxiety and personal expenditure.  The Money anxiety book demonstrates how consumers alternate between savings and spending based on their level of money anxiety. The strong association between the level of money anxiety and consumer savings and spending is very helpful to business and financial people, who can budget resources and inventories based on the financial anxiety level of consumers.

We are up to a good start in 2014.  If consumers’ money anxiety will continue to decline at the current pace, we will see a noticeable improvement in the economy this year.

 
 
PictureMoney Anxiety Index in the last 12 months
January Money Anxiety Index (moneyanxietyindex.com) at 79.1 is the lowest reading of consumer financial anxiety since January of 2009, when the Money Anxiety Index stood at 78.9, indicating consumers are regaining financial confidence.  January Money Anxiety Index at 79.1 is an improvement of 13.3 over the same month last year, which indicates a downwards trend in consumer financial anxiety in the last 12 months.  The improvement in the level of financial confidence among consumers is reflected in some of the most significant economic indicators.

Personal consumption, which makes up about 70 percent of Gross Domestic Product, has gradually increased throughout 2013 indicating more financially confident consumers.  In the first quarter of 2013, personal consumption increased by 1.1 percent over the fourth quarter of 2012.  In the second quarter of 2013, the increase in personal consumption jumped to 2.5 percent over the previous quarter, and in the third quarter of this year, the increase reached 4.1 percent according to data from the US Department of Commerce.

Another indication of improved level of consumer financial anxiety is the report released last week by The Commerce Department showing that durable goods orders jumped 3.5 percent in November as demand increased for a range of goods from aircraft to machinery and computers and electronic products.  Non-defense orders, excluding aircraft, surged 4.5 percent making November’s figure the largest increase since January.  The report suggested strength in manufacturing, which supports the observation made by the Money Anxiety Index that consumers are exhibiting less financial anxiety, thus creating greater demand for durable goods. 

The link between consumers’ financial anxiety and their spending habits has been empirically demonstrated in the newly published book Money Anxiety (moneyanxiety.com), which shows the link between consumers’ level of financial anxiety and personal expenditure.  The Money anxiety book also explains why the level of consumer financial anxiety impacts retail sales and bank savings by introducing a newly-developed segmentation method, Behavioralogy, which defines the financial behavior of consumers in six types of financial orientations: Mattress Money, Durable Diet, Power Play, Tiny Treats, Rate Race and Castle Craze. 

“Any business can greatly improve its performance just by applying the principles of Money Anxiety” said Dan Geller, Ph.D. Behavioral Economist, “business and financial people, who ignore the impact money anxiety has on how and why consumers buy, are operating in the dark.”