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 How Does Age Affect Spending Habits and Perception of the Health of the Economy? Department of Economics The University of Akron Fall 2009 Jessica Collins & Emma Shinko 21 October 2009 Age is a large factor in one's view of the economy and their resulting actions as a consumer within it. Using the models of consumer confidence and perception of the economy, individuals were surveyed in respect to age to develop an understanding of their respective habits in regards to their view of the current and future economy. Collins & Shinko 1 IntroductionThe “perception versus reality” argument exists in economics for a number of reasons.
One, being that economics itself is not a “hard science” (such as traditional subjects like physics
or chemistry), there is a lot of subjective psychological analysis that marries data to results,
especially in economic analysis pertaining to large populations. Because many economic
indicators, such as consumer confidence, are based upon consumer behaviors, it is sometimes
significant to pay heed to the intentions that motivate consumers to spend or save (otherwise
known as the underlying “why” behind such results). In addition, economists themselves are
often in disagreement over values and scientific judgment. For example, in the Economics1 text
written by Mankiw and Taylor, it was noted that 80% of surveyed economists believe that the
existence of a minimum wage leads to an increase in unemployment among unskilled and young
workers. This, however, does not mean that most economists are against minimum wage, or that
most economists believe that having a minimum wage only produces negative outcomes. The
reality stands that many nations, including the US and the UK, have an imposed minimum wage.
Again, it is important to recognize the discrepancies between reality and perception in economics
because these differences can drive results.
For the purposes of this report, both the perception and the reality of consumer spending
habits and the health of the economy are studied. Sometimes, these perceptions can be compared
directly to quantitative data. For instance, the perception of the health of the current economy
can be compared directly to current GDP to reveal whether an economic boom, recession, or
depression is being felt. In other cases, the analysis is less direct. For example, historical data
on consumer spending habits can be compared with GDP to reveal trends between how spending
is affected by good or hard economic times. These trends can then be compared to data from this
report to show how consistently this study’s survey respondents mimic past findings. Moving
further still towards qualitative analysis, survey responses regarding the future of the economy
can be compared with current forecasts that make informed conjectures as to what the state of the
economy will be in the following year. For the purposes of this study, another variable will be
thrown in the mix to show to what degree age affects both spending habits and perception of the
health of the economy (e.g. are younger individuals more pessimistic about the state of the
economy, do older individuals have a higher propensity to save, etc).
Theoretical OverviewA possible explanation regarding consumers and their optimism or pessimism towards
the current state of the economy lies within the consumer confidence index (CCI) that is
1
Mankiw, N.G., & Taylor, M.P. (2006). Economics. London: Thomson Learning. Collins & Shinko 2 measured monthly in the United States. The survey, conducted by The Conference Board,
consists of five questions that respondents comment upon as either “positive,” “negative,” or
“neutral” – current business conditions, business conditions in the next six months, current
employment conditions, employment conditions for the next six months, and total family income
for the next six months. These results are tabulated in their absolute values and held against the
“control” year of 1985 where CCI is designated a value of 100.
Why are such questions significant? As a true example of the “perception versus reality”
conundrum, retailers and manufacturers are able to use this information to make decisions about
sales volumes and inventories. For example, a low CCI may reflect a consensus belief among
consumers that employment and incomes will contract. This by and large increases consumers’
propensity to save, which translates to lower sales volumes for retailers and manufacturers.
These companies may in turn decide to lessen production to meet the anticipated drop in
demand, or to lay off workers and cut back on overhead costs in favor of stabilizing future
capital investments. However, it is significant to note that the CCI reflects the beliefs of
consumers regarding the current and future states of the economy. Simply stating a fluctuation
in CCI lends no insight into how the factors that affect CCI will move absolutely; that is, a low
CCI or a high CCI may not necessarily coincide with periods of economic recession or boom.
Basic macro identities regarding the business cycle show that the economy of the United
States follows a long-term growth trend. Fluctuations in the business cycle are typically
measured using real GDP because it reflects an accurate picture of economic expansion and
contraction. While these cycles may be unpredictable and economists often argue over policies
regarding how to manage these cycles, it has been shown that when reduced to its most basic
form the business cycle follows a step-like growth trend.
Collins & Shinko 3 When the log function of real GDP is taken, graphs show that GDP tends to oscillate around the
zero mark (identifiable with a constant rate of growth). In an extremely basic sense, this graph
of GDP can be likened to scalar transformations of a sine curve, where every period of increase
(expansion) is followed by a period of decrease (contraction), yet never strays in the long term
from the origin.
Collins & Shinko 4 Rational expectation theory can be used to justify this movement, which states that no part of the
business cycle can persist perpetually because it would continue to create arbitrage opportunities.
This thought defies basic economic theory, which states that the economy is always naturally
converging to a point of equilibrium. While it is acceptable to assume that individual
measurements may be extreme (note the large peaks and troughs in the graph above), rational
expectation theory shows that the aggregate of all points of observation is typically in agreement
with long-term trends.
Literature OverviewConsumer spending habits vary with age due to a large number of factors. As recently as
2000, the US Department of Labor released a study2 about current consumer spending habits,
stating that those aged 35-64 account for the largest chunk of overall consumer spending; nearly
64%. A summary of the study’s findings is displayed below.
In ranking, those aged 35-64, under 35, and 65 and over share the largest to the smallest chunks
of consumer spending respectively. The study found that those individuals under the age of 35
typically do not own homes, and thus their primary expenditures consist of rents, educational
expenses, apparel, food, alcohol, and transportation costs. Those 65 and over reserve a great deal
of spending towards health care costs and cash contributions (such as those made to individuals
2
U.S. Department of Labor, Bureau of Labor Statistics. (2000). Spending habits by age (Summary 00-16).
Washington, DC: Government Printing Office. Retrieved from http://www.docstoc.com/docs/3391996/spendinghabits-by-age
Collins & Shinko 5 or churches), as well as costs associated with utilities, public services, and fuel. The 35-64 age
group contributed the largest amount to consumer spending, citing costs such as mortgage
payments, personal insurance, and pensions. While this group spends more on average than the
other two age groups, they tend to spread their income more evenly over expenditures. These
findings are consistent with previous notions on consumer spending in the US.
One of the issues that this survey attempts to answer is whether or not consumers
surveyed would spend more, less, or the same amount in the coming months (Christmas
included). For surveys regarding spending, the Christmas holiday is often used as a benchmark
by which to measure because 1) it is an annual event, and 2) people – secular and non-secular
reasoning included – will spend more money on average during this time of year than at any
other time period during the year. A recent 2009 Gallup poll3 indicated that, compared to last
year, it is forecasted that most Americans will be spending less money for Christmas than they
did last year.
The graph shown above displays a numerical result for about how much on average an individual
will spend on Christmas this year. While the numbers are not necessarily important for the
purposes of this paper, the trends are. Gallup polls indicated that this year’s outlook for
Christmas spending is the lowest expected since 1991, the first Christmas season to follow the
recession of 1990-1991. Economists cite the financial crisis of late 2008 as a major contributing
factor as to why consumers may be hesitant to buy this year.
3
Saad, L. (2009, October 12). Christmas spending down from a year ago [Web log message]. Retrieved from
http://www.gallup.com/poll/123608/christmas-spending-forecast-down-year-ago.aspx
Collins & Shinko 6 However, one interesting finding of the Gallup poll showed an interesting trend. Survey
respondents were asked to compare their anticipated Christmas spending this year to the year
previous using statements such as “more” or “less.” The result is shown below.
As shown in the graph, the percentage of those willing to spend less on Christmas this year is
anticipated to climb significantly – almost twofold of last year’s numbers. This year marks the
largest spread between those willing to spend more or less at Christmas than last year in the 18year span shown by Gallup.
The relation between consumer spending habits and consumer confidence is clear; when
consumer confidence is high (or low), consumers have a higher propensity to spend (or save). A
recent report released by Rasmussen Reports4 has reflected a significant drop this year in
consumer confidence related to the financial crisis. In the survey, respondents were asked to
share some of their views about the current state of the economy, and the results are summarized
below.
•
Today, eight percent (8%) of adults rate the economy as good or excellent. That’s down from 18% a year ago. Fifty-­‐two percent (52%) rate the economy as poor, a figure that is similar to 12 months ago. 4
(2009, September 14). Consumer, investor confidence lower than year ago when lehman brothers collapsed.
Retrieved from
http://www.rasmussenreports.com/public_content/business/indexes/rasmussen_consumer_index2/consumer_investo
r_confidence_lower_than_year_ago_when_lehman_brothers_collapsed
Collins & Shinko 7 Among investors, just six percent (6%) rate the economy as good or excellent, down from 23% a year ago.
•
As for the overall economy, 31% say it’s getting better, but 46% say the opposite. That’s a big improvement from a year ago when just 17% said the economy was getting better and 64% said worse.
•
Thirty-­‐one percent (31%) of adults rate their own finances as good or excellent. That’s down 11 points from a year ago. Forty-­‐six percent (46%) of investors rate their finances as good or excellent, down 12 from September 14, 2008.
What is significant to take away from these results is to note how consumers feel about the state
of the economy. While the numbers show improvement from last year’s, people still in general
feel that the economy is both performing poorly and not improving.
MethodologyA survey consisting of forty economically related questions was administered to fiftynine anonymous survey respondents without regard to age, sex, political affiliation, location,
employment status, or economic experience. A copy of the actual survey used can be found at
the end of this report. Each respondent was contacted either by phone or in person to complete
the survey and was asked to answer honestly and without having conducted prior research on
economic related questions. All survey respondents were also asked about their spending habits
and to comment on the current and future states of the US economy. These responses were
collected into an Excel spreadsheet to be manipulated through statistical methods using SAS
software.
In addition, the same survey was administered to all students of Dr. Myers’ Fall 2009
Computer Skills for Economic Analysis class to complete on their own. All responses were
collected into a separate Excel spreadsheet and combined with the data from the previous survey
respondents to be manipulated through statistical methods using SAS software, with the
augmentation of the “class” variable to identify which responses belonged to students of the
class. The additional sixteen students combined to create a total of seventy-five survey
respondents.
Once compiled, the data was imported to SAS to compute the frequency of respondents
that compared age to spending habits and perception of the health of the economy. These results
can be found in the data section that follows.
Data-
Collins & Shinko 8 Data was compiled with excel and manipulated through SAS; these are the findings,
noting both the frequency and percentage of total survey respondents for each response.
Table 1: Age versus Perception of How the Economy Is Currently Performing
18-­‐24 25-­‐30 36-­‐40 41-­‐50 50-­‐65 Total Not In a In a Slowly Growing Growing Contracting Recession Depression Total 20 6 11 8 3 48 26.27 8.00 14.67 10.67 4.00 64.00 5 2 5 3 1 16 6.67 2.67 6.67 4.00 1.33 21.33 1 0 0 0 0 1 1.33 0.00 0.00 0.00 0.00 1.33 0 0 0 0 1 1 0.00 0.00 0.00 0.00 1.33 1.33 1 0 0 7 1 9 1.33 0.00 0.00 9.33 1.33 12.00 27 8 16 18 6 75 36.00 10.67 21.33 24.00 8.00 100.00 Age groups were compared to the respondents' perception of the economy as it is right
now. Those surveyed were asked to comment on the current state of the economy, answering
with: growing, slowly growing, not growing, contracting, in a recession or in a depression. The
plurality of respondents (27) answered that the economy is slowly growing, with the response in
a recession coming in at 18, with contracting at a close 16. While the majority of 18-24 year
olds and 25-30 year olds responded either slowly growing or contracting, those in the 50-65 age
group responded heavily to the economy currently being in a recession.
Table 2: Age versus Perception of How the Economy Will Perform in the Coming Year
18-­‐24 25-­‐30 36-­‐40 41-­‐50 Grow at a High Pace 6 8.00 2 2.67 0 0.00 0 0.00 Slowly Grow 30 40.00 5 6.67 1 1.33 0 0.00 No Growth 9 12.00 1 1.33 0 0.00 0 0.00 Contract In a Recession Total 2 1 48 2.67 1.33 64.00 6 2 16 8.00 2.67 21.33 0 0 1 0.00 0.00 1.33 0 1 1 0.00 1.33 1.33 Collins & Shinko 9 50-­‐65 Total 0 0.00 8 10.67 2 2.67 38 50.67 2 2.67 12 16.00 1 1.33 9 12.00 4 5.33 8 10.67 9 12.00 75 100.00 To further understand the perception of the state of the economy, responders were asked
to comment upon how they feel the economy will do in the next year. While an overwhelming
majority of 18-24 year olds said the economy would slowly grow, the 25-30 year old group had a
wider spread of data. While five responders still believed the economy would slowly grow, the
plurality said the economy would contract. The 41-50 and 50-65 year old groups responded that
the economy would still be in a recession.
Table 3: Age versus Predictions about Spending Habits This Year in Comparison to Last Year
18-­‐24 25-­‐30 36-­‐40 41-­‐50 50-­‐65 Total About the More Less Same Total 19 12 17 48 25.33 16.00 22.67 64.00 6 7 3 16 8.00 9.33 4.00 21.33 0 0 1 1 0.00 0.00 1.33 1.33 0 0 1 1 0.00 0.00 1.33 1.33 4 4 1 9 5.33 5.33 1.33 12.00 29 23 23 75 38.67 30.67 30.67 100.00 When age groups were tabulated in comparison to spending plans for the coming months,
those surveyed who belonged to the extreme age groups were willing to spend more than those in
the mid-age groupings. Those surveyed who fell in the 18-24, 25-30 and the 50-65 age group
had many responders commenting that they planned to spend more than they had at this time last
year. However, responders in the 36-40 and 41-50 had no respondents planning to spend more.
Table 4: Age versus Plans on How to Spend Hypothetical $1,000 Given by Government
18-­‐24 Save or Spend Invest 10 Pay Down Debt 24 Total 14 48 Collins & Shinko 10 25-­‐30 36-­‐40 41-­‐50 50-­‐65 Total 13.33 5 6.67 0 0.00 0 0.00 2 2.67 17 22.67 32.00 6 8.00 1 1.33 1 1.33 4 5.33 36 48.00 18.67 5 6.67 0 0.00 0 0.00 3 4.00 22 29.33 64.00 16 21.33 1 1.33 1 1.33 9 12.00 75 100.00 When age was compared to the survey responses given for "If the government gave you
$1,000.00 would you: save it, spend it or pay down debt?" the plurality of each group responded
that they would save or invest it. For most age groups, spending the money was the least popular
response.
ResultsAll of the data collected and shown in the tables in the previous section was manipulated
with Excel to create bar graphs that show the frequency of each response in accordance with age.
In the first graph, it is clear to see that a greater number of younger respondents (40 and
under) believe that the economy is currently in a state of growth. However, in comparison to
older respondents (41 and over), the responses show that there is a far greater percentage of
individuals who believe that the economy is in a depression.
Collins & Shinko 11 Which response is correct? According to the most current release of GDP at the time this
survey was taken, GDP was contracting at a 0.7% annual rate. Since GDP is the most common
indicator used to determine the state of the economy, it can be said that the state of the economy
at this time was a period of contracting.
In this resultant graph, a large discrepancy between highly negative and highly positive
responses exists. While a multitude of reasons can be speculated upon (e.g., does political
leaning affect this perception?), one must remember that the study of economics tends to
combine elements from other sciences to reinforce certain concepts. For an explanation to this
phenomenon, we turn to the study of psychology, which lends discussions on development; the
adage that “along with age, comes experience” is universally true. If the 18-24 age group is
considered, their year of birth can be traced back to between 1985 and 1991. These individuals
spent the greater percentage of their childhood growing up during the “Clinton years,” when the
economy experienced a long period of sustained growth. In addition, according to the previously
discussed government report on spending habits, these are the people who often lack equity, have
high quantities of debt, earn a lesser average income, and have a lower propensity to save in
comparison with other age groups. This age group lacks not only experience with intrapersonal
economic issues, but also with the economy as a whole. In contrast, those individuals in older
age groups may feel less optimistic about the current state of the economy not only because they
have lived through one or more recessions, but because their financial obligations are more so
hinged on the activities of the economy (e.g., pensions being cut or dropped if a company goes
under).
When age and the perception of how the economy will perform were considered, the
results show that the greater majority of persons under the age of 40 believe that the economy
will grow at a high pace. However, among those over 40, the responses show a more varied
Collins & Shinko 12 consensus that is not as optimistic; “slowly grow” and “in a recession” were popular responses.
At the time that this survey was administered, the newest GDP report had not yet been released.
However, this report can now be used to analyze the “future” state of the economy as referenced
in context by the survey. According to the BEA, GDP grew at an annual rate of 3.5% during Q3
this year. While economists may differ on their opinions as whether to call this “high paced” or
“slow” growth, for all intensive purposes of this report, a growth rate of 3.5% annually will be
described as a moderate growth rate, or “slow” growth (i.e., a growth rate of 8.5% annually, for
instance, would have been called for certain “high paced” growth).
The individual perceptions in this case are not necessarily more optimistic than the
reality, except among those aged 50-65 (where “in a recession” was the most common response).
Again, referencing the government publication on spending habits from before, it can be
assumed that the financial obligations of people in the age group – the closest to retirement, and
those who are preparing to incur the highest health care costs of their lives – might be naturally
pessimistic about the economy regardless of its absolute movement.
When spending habits of this year in comparison to last year was considered as a survey
question, it was important to remind respondents that the Christmas holiday would need to be
included in their personal assessment. The most current Gallup poll indicates that a great
majority of people will be spending significantly less on this year’s Christmas season than last
year - this does not account for all of the spending that one person does in a year, but it has been
a longstanding fact that retailers and manufacturers push more product this time of year than at
any other single point in the year. According to the results of this study, there really are no agewide trends that appear. Among the youngest respondents, the greatest number of people plan to
spend more this year (which contradicts the Gallup poll), but in the next-youngest age group the
Collins & Shinko 13 majority of people plan to spend less. Among those aged 50-65, those planning to spend more or
less this year are equivalent.
Several factors can affect Christmas spending. The more people that a person has to buy
for, the more thinly resources are spread. For those with a larger family (children, grandchildren,
etc), this can be an added strain during rough economic times; families tend to get larger with
age. Personal finances can also affect Christmas spending. Even though the youngest age group
(18-24) has a lower average income than other age groups, they have a higher percentage of
disposable income that is not tied up in mortgage payments, retirement, debt management, and
other associated costs of running a household; in fact, it was discussed earlier that among the
largest expenses of people in this age group, alcohol and apparel were included. Perception of
the economy also affects Christmas spending in that rougher economic times increase one’s
propensity to save rather than spend. Earlier, it was found that for this study younger people
were more optimistic about the current and future states of the economy. According to this, then
it would appear only natural that younger people are willing to spend more for the holidays than
older people, who answered more pessimistically.
When asked what their plans would be for a hypothetical $1,000 check from the
government, the most common response was to “save or invest” the money. The next most
popular answer was to “pay down debt” with the money given. This trend transcends all age
groups, from young to old, showing that age bears little significance here.
What are the greater implications of this result? While surveys are helpful in economics,
there is one very common misunderstanding about the information gathered; economics is based
not on what people say, but what people do. In the first two graphs, respondents were asked how
they feel about the current and future state of the economy. Referring back to both of these
Collins & Shinko 14 graphs, it can be said that the greater portion of all respondents were slightly optimistic about the
economy. It has been shown time after time, however, in the study of consumer confidence, that
people have a greater propensity to spend when they feel that the economy is doing well (real or
perceived; today or tomorrow) and a greater propensity to save when they feel that the economy
is doing poorly.
While it has been recognized that survey respondents were not actually given $1,000 and
thus their uses for it could not be studied, it stands that perhaps this is a better question to ask
consumers about their feelings about the economy for the reasons discussed previously. The first
two questions, if taken alone, paint a picture of the economy with a bit of a rosy hue; this
question, when taken alone, shows that people have less faith in the health of the economy and
will thusly act with more caution with their money.
SummaryIn the data, the younger age group was more optimistic about the state of the economy
and therefore was more willing to spend. Their consumer confidence was much higher than that
of the older groups. This affected their spending habits. When younger people commented upon
their plans for spending, they intended to spend more in the coming months. Because the
economy was looking upward, they would spend more.
When looking at the younger group's plans for $1,000.00, one can also see the optimism
of the group. While they were not overwhelmingly willing to spend the $1,000.00, many
surveyed responded to saving or investing that money. While this is not an overwhelming rush
to stimulate the economy as spending would be, investment also helps the economy and saving,
the monetary system. Respondents answered almost as strongly to spend the money as they did
to pay down debt with this money. While many in this age group are incurring large amounts of
debt through education and other life-starting expenses, this is to be expected regardless of the
state of the economy. Most interesting, however, is that respondents wished to save or invest the
funds if they were to be given.
Older groups responded more negatively in their perception of the economy as it is and
will be in the next year which affects their economic activity. As they expect the economy to
continue to do poorly, their willingness to spend in the coming months and if given $1,000.00 is
much less than those with a more optimistic standpoint. With their Consumer Confidence in the
economy at a low level, their spending level will decrease.