Expectations and Household Spending

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%.