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Watch Dr. Dan Geller author of Money Anxiety explains how our financial anxiety impacts the economy; how physiology, psychology and behavioralogy dictate our financial behavior; why our financial behavior can make or break the economy and why the U.S. economy is doing better compared to the EU. Dr. Geller appeared on The Big Biz Show with Bob “Sully” Sullivan and Russ Nailz..

 
 
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Gallup’s Standard of Living Index climbs to highest in 7 years corresponding to the lowest Money Anxiety Index in 7 years.

Gallup's Standard of Living Index reached a new high of +50 in December, the best score found in 7 of tracking the index. The Gallup poll matches the Money Anxiety Index showing the lowest level of financial anxiety among consumers in the past 7 years.  Seven years ago, in December of 2007, the Money Anxiety Index started climbing up to a high of 97.6 in the aftermath of the Great Recession, and gradually declining to its current level of 65.9.

According to Gallup, Americans' improved perspective on their personal standard of living comes as they spend more money and begin to view the national economy positively.  The increase in consumers’ confidence about the economic recovery lowered their level of money anxiety, which promoted higher spending.  When consumers feel less financially anxious, they spend more money because they are more confident about their future ability to earn income as the employment situation improves.  

A major factor in the gradual improvement of the Money Anxiety Index is the continued positive news on employment.  The December employment figures show that the economy added 252,000 nonfarm jobs, and the unemployment rate dropped to 5.6 percent - the lowest it has been in the past 6 years.  The November figures where upwardly revised to 353.000 new jobs.

The Money Anxiety Index measures consumers’ level of financial worry and stress.  Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid 1960s.  The money anxiety Index was developed by Dr. Dan Geller, who is an expert in behavioral finance, and the author of the book Money Anxiety.  The index is highly predictive.  It signaled the arrival of the Great Recession over a year prior to the official declaration of the recession in December of 2007.   

 
 
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December retail sales are good news when looking at the whole picture of 3.2 percent yearly growth rather than one single frame for the month.

December retail sales were up 3.2 percent over the same month the year prior, which is the whole picture and not the decrease of 0.9 for the month reflecting one single frame of data.  The year-over-year increase in retail sales tells the big picture of growing demand for goods and services that is the main engine of the U.S. Economy.

The yearly increase of 3.2 percent in retail sales mirrors the improvement in the financial confidence of consumers.  The Money Anxiety Index, which measures consumers’ financial behavior, decreased by 12.9 index points from December 2013 to the same month in 2014. The sizable decline in the level of money anxiety among consumers during 2014 is the largest yearly improvement since the Great Recession.  

The link between consumers’ spending habits and their level of financial worry and stress is strong and significant.  Research presented in the book Money Anxiety clearly shows how consumers reduce their spending at the first sign of an economic slowdown.  Conversely, consumers gradually increase their spending when the economy is improving, as in the case of the 3.2 percent increase in retail sales during 2014.

 
 
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Rising rates, rising rates was cried before but they never did.  What if this time rates will rise and no one is ready?

We all know the story about the boy who falsely cried wolf too many times that no one paid attention when the wolf really came and attached the sheep.  So the question is – how do we know that this time the cry for rising rates is for real?  Well, we don’t, but since this time the probability of rising rates is high, we better be ready.

Here is a simplified way to look at the probability of rising rates in 2015.  The Fed, through its voting members, is faced with a dilemma.  The U.S. economy is improving steadily, GDP is increasing mostly due to greater consumer consumption and the employment situation has greatly improved in the last few years.  All in all, most of the vital signs of the U.S. economy are healthy and the economy can sustain a mild rise in short-term rates.  Except, of course, for very low inflation rate caused mainly by low gas prices and flat wage level.

So the dilemma is – do you raise the funds rates based on the improving aspects of the economy with the hope that the dip in oil prices is going to be short lived and inflation will rise later on?  Or, do you hold off on increasing the funds rate until inflation reaches the 2 percent mark thus delaying normalization for the longest time period in U.S. history?  Based on the latest announcement from the FOMC and the new makeup of its voting members, there is a 75 percent chance that the funds rate will increase in June of this year, and a 25 percent chance that it will be delayed.

So, if you know that there is a high probability that the wolf is really coming this year; what do you do?  You get ready.

 
 
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Listen to Dr. Dan Geller speak on NewsRadio 600 KOGO with Bob “Sully” Sullivan.

Take a short journey into the financial mind and discover why we spend when safe and save when scared; why we hate to lose more than we love to win, and why financial New Year resolutions don’t work.


 
 
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November real personal consumption expenditures were up 2.8 percent from the same month last year suggesting that consumer spending in the 4th quarter of 2014 will lead to stronger spending in 2015. A major factor in the acceleration in consumer spending is the Money Anxiety Index, which is showing that the current level of financial anxiety among consumers, at 67.0, is the lowest since the eve of the Great Recession in December of 2007.   

The decrease in the level of financial anxiety among consumers is attributed mainly to strong employment figures and growth in personal income.  The November employment figures show that the economy added 321,000 nonfarm jobs, which is the strongest monthly gain in nearly three years increasing the three-month employment average to a gain of 278,000 per month.  Personal income increased 0.4 percent in November from an upwardly revised 0.3 percent growth in October. Additionally, wages and salaries increased 0.5 percent in November.

November advance retail sales improved across the board and along with the upward revision in October sales to 0.5 percent, the projection for this holiday season is very strong.  Year-to-date, the increase in motor vehicles and parts is up 8.6 percent, building material and garden equipment and supplies up 7.8 percent, non-store retailers up 8.7 percent, electronics and appliance, up 6.9 percent and food services and drinking places up 6.7 percent.

Dr. Dan Geller is an expert in behavioral finance and the author of the book Money Anxiety.  He was the first to establish the link between the level of financial anxiety and consumer behavior showing how consumers shift their savings and spending habits based on their level of money anxiety.   He can be reached at drgeller@moneyanxiety.com