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July’s personal consumption expenditures fell 0.1 percent in a first such drop since January of this year.  The decrease in personal consumption corresponds with the increase in the Money Anxiety Index in the first two month of the 3rd quarter.  During July and August, the Money Anxiety Index increased 1.5 points, from 71.3 to 72.8, paving the way for the decrease in personal consumption in July and most likely in August.

Personal consumption in July declined $12.0 billion compared to an increase of $51.2 billion in June, a variance of $63 billion cased by higher level of money anxiety.  Durable goods purchases, which include automobiles, appliances and other high-ticket items, decreased 0.6 percent in July after increasing 0.5 percent in June.  The increase in the Money Anxiety Index in the 3rd quarter thus far is an indication that consumer consummation is likely to be much lower than originally forecasted, thus lowering GDP expectations for the 3rd quarter of 2014.

The increase in the level of money anxiety starting in July is caused by concerns over major geopolitical events, especially the worsening economic and financial conflict with Russia over Ukraine. The link between the level of money anxiety and consumer spending has been empirically demonstrated in the book Money Anxiety.  Research shows that when consumers feel more financially anxious, they reduce their spending as a reaction to their instinct for self preservation.


 


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