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Change in financial confidence instantly impacts consumers’ decision to increase or decrease spending.

When consumers feel more financially confident, they increase consumption instantly, and when they are financially anxious, consumers reduce spending right away.  These are the findings from the latest study conducted by the Money Anxiety Index.

The study shows that in the past 15 years, consumer consumption increased in the same month that the Money Anxiety Index decreased, reflecting higher level of financial confidence.   Conversely, when the level of consumer financial confidence decreased, consumer consumption decreased as well with no lag time between the two events.

The study included monthly data of Personal Consumption Expenditure (PCE) published by the U.S. Department of Commerce, and monthly data of the Money Anxiety Index over the same time period.  The analysis shows that the lag time between the two events had the highest cross correlation (.597) at zero lag time, meaning within the same month of occurrence.
 
The Money Anxiety Index measures the level of consumers’ financial worry and stress based on their spending and savings pattern.  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 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.   

Dr. Dan Geller is a behavioral finance scientist exploring the link between the level of financial anxiety and the savings and spending habits of consumers.  In his book, Money Anxiety, Dr. Geller uncovers the mystery of the financial mind, explaining why we hate to lose more than we love to win and why we spend when safe and save when scared.


 


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