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The sluggish economy and the never-ending recovery are not about lack of money – they are about lack of confidence that tomorrow will be better than today.  This is the moral of a true story about the state of mind of consumers, and why money itself can’t revive the economy.

I was having a discussion with a reader of my book Money Anxiety.  The reader is a man of means who lives very comfortably.  “I read your book” he told me, “and I want to tell you a true story that supports your assertion that what’s ailing the economy today is not necessarily lack of money.” 

“I was walking downtown on my way to buy a big-screen TV”, he started the story.  As I was about to enter the store, I heard the news about the collapse of Lehman Brothers – this was in September of 2008.  I remember standing there in front of the store thinking to myself: I have money; I can walk right into the store and get any big-screen TV, but do I want to make this purchase not knowing how the economy is going to look like tomorrow?”

 What did you end up doing? I asked him.  “I turned around and walked back to my office” he replied.  “What amazed me the most”, he continued, “is that it was not about the money – I could easily afford it – it was about the way I felt about the economy.”  Now multiply this story by millions or tenth of millions of consumers, who can afford spending more but are holding back because they “just don’t feel right about the economy.” 

This is the reason the current economic recovery is the longest and most persistent at least since the Great Depression.  Despite trillions of dollars in QE money and near zero Fed funds interest rate for over 6 years, the economy is not yet back to where it was pre recession.  Yet, the amount of money sitting in banks and credit unions accounts is at an all time high - $12 trillion.

The cautionary level of consumer spending is evident in the Money Anxiety Index, which measures the level of consumer financial uncertainty and anxiety.  On the eve of the Great Recession, in November of 2007, the Money Anxiety Index stood at 58.6 compared to 64.6 in May of this year.  Despite a time period of over 7 years, the level of financial anxiety is not yet back to where it was pre recession.  The slow and gradual improvement in the level of consumer financial confidence points to the growing role emotions, such as financial uncertainty and anxiety, have in economic recoveries.

“We can no longer assume that if people have more money they will spend more” says Dr. Dan Geller, the developer of the Money Anxiety Index and the author of the book Money Anxiety, “we must also consider the soft side of economics represented by consumers’ financial uncertainty and anxiety.”  
Dr. Dan Geller is a behavioral finance scientist, who pioneered the research on the link between consumers’ financial fear, their instinctive or analytical decisions and the economy.  

The Money Anxiety Index measures the level of consumers’ financial worry and stress associated with their spending and savings pattern.  The Money Anxiety 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.  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.  


 
 
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The current economic recovery is the longest and most persistent at least since the Great Depression.  Despite trillions of dollars in QE money and near zero Fed funds interest rate for over 6 years, the economy is not yet back to where it was pre recession.  We are witnessing a shift to a new economic reality, where traditional economic measures are not enough to overcome the emotional side of economics – financial uncertainty and anxiety.

Past recessions and recoveries used to have fast economic decline and somewhat rapid recovery; also known as “V” shape or “U”Shape recessions.  Not this time.  Although the economic decline of the last recession was very fast, the recovery is not.  The main reason for the prolonged recovery is that consumers and businesses practice caution and hesitation when it comes to resumption of spending and expansion.

The cautionary resumption of economic activities is evident in the Money Anxiety Index, which measures the level of consumer financial uncertainty and anxiety.  On the eve of the Great Recession, in November of 2007, the Money Anxiety Index stood at 58.6 compared to 64.6 in May of this year.  Despite a time period of over 7 years, the level of financial anxiety is not yet back to where it was pre recession.  Such slow and gradual improvement in the level of consumer financial confidence points to the growing role emotions, such as financial uncertainty and anxiety, have in economic recoveries.

“We can no longer measure economic activity only with hard indices” says Dr. Dan Geller, the developer of the Money Anxiety Index and the author of the book Money Anxiety, “we must also consider the soft side of economics represented by consumers’ financial uncertainty and anxiety”.
 
The Money Anxiety Index measures the level of consumers’ financial worry and stress associated with their spending and savings pattern.  The Money Anxiety 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.  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.  

 
 
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Consumers change their spending habits right away when their level of financial anxiety increases, but wait a month before they express their action when responding to consumer confidence surveys.   These are the findings from the latest study measuring the link between financial confidence and consumer spending conducted by the Money Anxiety Index.

The study measured the lag time between two types of financial confidence indices, one based on action and the other on surveys, and the level of Personal Consumption Expenditure (PCE) over the past 5 years.  The analysis shows that when the Money Anxiety Index increases, consumers respond immediately by reducing spending, and when their level of money anxiety decreased, consumers resumed higher spending in the same month.  The Money Anxiety Index consists of 

Conversely, when responding to consumer confidence surveys, such as the Thomson Reuters/University of Michigan Index, the lag time is one month after consumers have already acted.  This means that when consumers report lower confidence level in the survey, they have already decreased their spending in the prior month, and when they report higher confidence level, their spending increased the month before.  The raw data for this analysis is available upon request from drgeller@moneyanxiety.com  
 
The Money Anxiety Index measures the level of consumers’ financial worry and stress associated with their spending and savings pattern.  The Money Anxiety 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.  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.  

Dr. Dan Geller is a behavioral finance scientist and the author of the best-selling book Money Anxiety, which explores the financial behavior of consumers.  Dr. Geller speaks about behavioral finance to groups and at conferences and is frequently featured on national TV and radio programs.