Expectations and Household Spending

Authors

Abstract

We estimate the effect of expectations about unemployment on household spending using high-frequency panel data from the RAND American Life Panel.  The data were collected during the Great Recession and its aftermath, a time of great economic uncertainty. We use monthly data both on total household spending and on subcategories of spending. We find that changes in total spending made in response to changes in the chances of becoming unemployed are difficult to detect empirically. This is because many categories of spending, such as rent, utilities, and car payments, tend to be fixed from month to month. Nevertheless, when studying subcategories of spending that are more easily adjusted in the short-term we find significant effects. For example, in response to an increase from 0 to 1 in the probability of becoming unemployed, we estimate that households reduce spending on clothing by about 14%, dining out and other entertainment by 11%, and personal care by 12%.

Key Findings

  • Basic economic theory suggests that consumption and saving will be affected by expectations, including expectations about unemployment.
  • Based on high frequency data from the RAND American Life Panel, we estimated that total spending changed very little in response to changes in the subjective probability of unemployment.
  • However, a subaggregate of 20 spending items that can be relatively easily adjusted to changes in circumstances did respond to changes in the subjective probability of unemployment:  an increase of 10 percentage points in the probability was associated with a reduction in spending of 1.9%.
  • Several categories of spending were particularly responsive:  clothing, dining out, entertainment and personal care products.

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Project

Paper ID

WP 2013-300

Publication Type

Working Paper

Publication Year

2013
pavement-enterprise