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Consumers are riding a money anxiety rollercoaster so far this year; going up in the 1st quarter, down in the 2nd quarter and back up in the 3rd quarter.

The Money Anxiety Index resembles a rollercoaster so far this year.  In the 1st quarter, the level of money anxiety among consumers increased by 1.4 points to 79.3 due to severe weather conditions and the increase in health-care expenses related to the new health care law.  As a result, GDP for the 1st quarter was negative 2.1 percent.  

In the 2nd quarter of this year, the level of money anxiety among consumers subsided by 7.7 points to 71.6 mainly due to positive news on employment, which added over 200,000 non-farm jobs each month during the quarter.  The decrease in the level of money anxiety during the 2nd quarter pushed GDP up by 4.0 percent compared to the previous quarter.

However, as rollercoasters go, the 3rd quarter Money Anxiety Index is up again.  After a promising second quarter, the Money Anxiety Index increased 1.1 points thus far to 72.7 signaling higher level of financial anxiety among consumers as a result of economic uncertainty over the conflict with Russia.  As a result of higher money anxiety, July retail sales were flat and new home sales fell 2.4 percent in July.


 
 
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The "unexpected" drop in the Thomson Reuters/University of Michigan's consumer sentiment index for August was predicted by the Money Anxiety Index a week ago.

The Money Anxiety Index predicted the unexpected drop in consumer confidence in its release on August 7, when it warned that consumers feel more financially anxious and less confident due to uncertainty over the economic conflict with Russia. On Friday August 15, the Thomson Reuters/University of Michigan's Consumer Sentiment Index came in at 79.2, substantially lower than the median forecast of 82.5 projected by economists polled by Reuters, and down from the final reading of 81.8 in July.

The release by the Money Anxiety Index (www.moneyanxietyindex.com) on August 7 stated that After a promising second quarter, the Money Anxiety Index is trending upwards signaling an increase in the level of financial anxiety and lower consumer confidence as a result of economic uncertainty over the conflict with Russia. The August preliminary Money Anxiety Index increased to 72.7 after ending the second quarter with 71.6.

Consumers' financial concerns and the subsequent increase in their level of money anxiety are already substantiated by the latest development surrounding the conflict with Russia. Last week Russia announced boycott of U.S. produce for one year which totals $1.3 billion. Additionally, Europe, which is a critical market for the U.S. is starting to crumble economically with Italy leading the way falling back into a recession after experiencing two consecutive quarters of declining GDP. 

 
 
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Despite flat overall retail sales in July, sales of personal care items increased 0.4 percent reflecting a financial behavior pattern known as “Tiny Treats”. 

Although overall retail sales were flat in July, consumers increased spending of personal care items by 0.4 percent in the same month.  The increase in spending on “Tiny Treats”, such as personal care items, during times of higher money anxiety is a known phenomenon in behavioral finance.  The flat retail sales in July mirror the increase in the level of money anxiety among consumers.  The Money Anxiety Index increased 1.1 index points from 71.6 in June to 72.7 in July.  

This behavioral pattern is known as “Tiny Treats” in behavioral finance a.k.a. behavioralogy.  When the level of money anxiety increases, consumers compensate themselves with tiny treats, such as personal care items, which increased 0.4 percent in July, as a substitute for not buying more expensive items such as cars, which decreased 0.2 percent in the same month.  

Behavioralogy defines six types of financial behaviors consumers exhibit during high, average and low levels of money anxiety. Consumers modify their financial behavior relative to the economic conditions they are anticipating or currently facing.  The six financial behavior types described in the book Money Anxiety are: Mattress Money, Durable Diet, Power Play, Tiny Treats, Rate Race and Castle Craze.

 
 
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Uncertainty over the future and scope of the economic conflict with Russia fuels the level of money anxiety among consumers despite improving U.S. economic conditions. 

After a promising second quarter, the Money Anxiety Index is trending upwards signaling an increase in the level of financial anxiety among consumers as a result of economic uncertainty over the conflict with Russia.  The August preliminary Money Anxiety Index increased to 72.7 after ending the second quarter with 71.6 – the lowest level of money anxiety since the Great Recession.

The trending increase in the Money Anxiety Index since June reflects growing concerns among consumers about the financial and economic impact the conflict with Russia will have on the U.S. economy.  This heightened level of financial anxiety comes amid improving economic conditions in the U.S. in the second quarter of this year, which shows that the concern over the economic conflict with Russia is over shadowing optimism about the improving U.S. economy.

Consumers’ financial concerns and the subsequent increase in their level of money anxiety are already substantiated by the latest development surrounding the conflict with Russia.  Yesterday, Russia announced boycott of U.S. produce for one year which totals $1.3 billion.  Additionally, Europe, which is a critical market for the U.S. is starting to crumble economically with Italy leading the way falling back into a recession after experiencing two consecutive quarters of declining GDP.  

 
 
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Consumers resume spending on cars, furniture and appliances with an increase of 14.0 percent in durable goods purchases in the second quarter; the highest increase since the Great Recession.

A record quarterly increase of 14.0 percent in durable goods purchases since the Great Recession was reported today by the U.S. Department of commerce.  During the Great Recession, consumers cut back on purchases of durable goods, such as cars, furniture and appliances, in a phenomenon known in behavioralogy as “Durable Diet”.  The second quarter growth of 14.0 percent in durable goods spending indicates that consumers are off their “durable diet” due to lower level of money anxiety.

About half of the 14.0 percent increase in durable goods spending was on automobiles followed by noticeable increases in purchases of furniture and appliances.  The second quarter increase is in sharp contrast to the height of the “Durable diet” period in the fourth quarter of 2008, when consumer spending on durable goods declined 25.8 percent in response to an increase in consumers’ level of money anxiety.

 The link between the level of money anxiety among consumers and their spending on durable goods is clearly demonstrated in the book Money Anxiety. During the 2008-2009 recession, when the Money Anxiety Index reached a high of 94.4, consumers reduced spending on durable goods by as much as 16.3 percent.  In contrast, during the second quarter of this year, the level of money anxiety subsided to 71.3 promoting consumers to get off their “durable diet” resulting in an increase of 14.0 percent in purchase of durable goods.