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The idiom shop ‘til you drop is true but the drop is not from exhaustion, rather it is in financial confidence.

Financial confidence is a major driver in the shopping habit of consumers.  When financial confidence increases, consumers spend more money, and when their financial confidence drops, they spend less.  These are the findings from the latest study conducted by the Money Anxiety Index on the link between financial confidence and consumer consumption.

The study shows very strong correlation (.612) between the level of consumers’ financial anxiety and the level of consumer consumption.  Moreover, the study shows that changes in the financial anxiety of people explain 37 percent of the changes in the level of spending, which means that there is a very strong and significant causal relation between the two events.

Also, there is no lag time between changes in financial anxiety and spending.  Analysis shows high cross correlation (.597) between financial anxiety and consumer spending at the zero lag time, meaning that the two events occur within the same month. Thus, when consumers feel a change in their level of financial confidence, they react right away.  

The study consists of monthly data of Personal Consumption Expenditure (PCE) from January 2000 to December of 2014, published by the U.S. Department of Commerce, and monthly data of the Money Anxiety Index over the same time period.  
 
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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