SAN FRANCISCO, Jan. 22, 2019 /PRNewswire/ -- If consumers spend less due to higher money anxiety caused by the Government shutdown, a recession could result, according to a newly-published study in the Journal of Applied Business and Economics: "Dynamics of Yield Gravity and the Money Anxiety Index" co-authored by Dr. Dan Geller and Prof. Nahum Biger.
"People instinctively are reducing their spending as survival mechanism when their money anxiety increases," said Dr. Dan Geller the developer of the Money Anxiety Index and the author of the behavioral economics book Money Anxiety.
"Since about 70 percent of Gross Domestic Product (GDP) is made up of consumer consumption, it means that a mere 5 percent reduction in consumption translates into 3.5 percent of GDP. Therefore, even if the U.S. economy grows at an annualized rate of 2.5 percent, the 3.5 percent reduction in in GDP resulting from reduction in consumption will push the U.S. economy into negative territory – i.e. recession. The cycle of economic uncertainty, which increases money anxiety and thus lowers consumption is a self-fulfilling prophecy for a recession," he said.
When the Government shutdown started in late December of 2018, the Money Anxiety Index increased by 2.2 index points to 45.4 and it remained flat so far in January of 2019. The Money Anxiety Index has been declining ever since June 2011, when it peaked at 100.5 in the aftermath of the Great Recession. However, the economic uncertainty brought by the Government shutdown may reverse this course of declining money anxiety, which will cause a reduction in consumer consumption.
"The U.S. economy is enormous but very fragile," said Dr. Geller. "We view the economy as a solid and stable economic block, but in reality, it is just a collection of millions of individual minds making consumption decisions based on their level of confidence that tomorrow will be a better day than yesterday."
The Money Anxiety Index is an objective reflection of financial confidence. It measures what people actually do with their money rather than what they say in response to surveys. By contrast, other leading consumer confidence indices are based on a questionnaire that asks people what they think about the economy. This distinction is very significant because monitoring financial action, through the Money Anxiety Index, is much more timely and relevant in assessing consumer financial confidence based on what people think about the economy.
The Money Anxiety Index is highly predictive and very reliable. It is currently used by many financial institutions to project economic changes that are likely to impact interest rates and lending risk level. Prior to the Great recession, the index showed how peoples' money anxiety was trending upwards starting in October of 2006; nearly 14 months before the official start of the Great Recession in December of 2007. 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.
Analyticom is a behavioral economics firm dedicated to providing banking executives with financial foresight. Analyticom provides the banking industry with advanced analytics and scientific models that forecast the impact of behavioral economics on banking products. The mission of Analyticom is to assist banking executives see ahead and stay ahead.
About Dr. Dan Geller
Dr. Dan Geller is a behavioral economist who pioneered the research and application of behavioral economics to the banking services. Through his research firm, Analyticom, Dr. Geller provides banking executives with scientific forecasting and pricing models enabling them to improve financial performance. Dr. Geller is a frequent speaker and media guest. He appeared on national TV and radio, such as CNBC and Fox, and delivered the keynote address at the American Banker's Symposium. He is the author of the groundbreaking book on the impact of Money Anxiety on the economy.
Dr. Dan Geller