SAN FRANCISCO—If consumers spend less due to higher money anxiety caused by the partial government shutdown, the result could be a recession, a new analysis asserts.
"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, pointing to the study published in the Journal of Applied Business and Economics: "Dynamics of Yield Gravity and the Money Anxiety Index." The report was co-authored by Geller and Nahum Biger.
"Since about 70% of gross domestic product (GDP) is made up of consumer consumption, it means that a mere 5% reduction in consumption translates into 3.5% of GDP. Therefore, even if the U.S. economy grows at an annualized rate of 2.5%, the 3.5% 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," Geller said.
‘Very Fragile’
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, Geller said.
The Money Anxiety Index has been declining 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, Geller said.
"The U.S. economy is enormous but very fragile" said 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."