Behavior Predicts Recessions Better
Prior to the Great recession, (December 2007-June 2009), the Money Anxiety Index warned of a looming recession three months before the Michigan Consumer Sentiment Index (See graph). During these three months, consumers continued to respond with high confidence to the Michigan survey, but in reality they started to spend less and save more, which was captured by the Money Anxiety Index.
Similarly, during the recession of March 2001 - November 2001, the Michigan Consumer Sentiment Index was one month behind the Money Anxiety Index in detecting a change in consumer confidence, and the same prior to the recession of July 1990 - March 1991. Prior to the recession of January 1980 to November 1882, the Money Anxiety Index started warning of a looming recession three months before the Michigan Consumer Sentiment did the same.
What is the Money Anxiety Index?
The Money Anxiety Index measures various economic indicators and factors associated with consumers’ level of financial worry and stress. The Money Anxiety Index functions as an early-warning system to shifts in the economy, allowing financial advisors to react in time to changes in the economic cycle.
The Money Anxiety Index Is highly predictive. It predicted the arrival of the Great Recession over a year prior to the official declaration of the recession in December of 2007. In the graph below, you can see how consumers’ money anxiety is trending upwards starting in October of 2006.
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Money Anxiety Index – historical perspective
The Money Anxiety Index consists of monthly measurement of the level of consumers’ financial anxiety for over 50 years. It spans from January 1959 to date. 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. The 50-year average is 70.7 (July 1980 = 100).
The Money Anxiety Index was developed using Structural Equation Modeling (SEM) with a large sample size of monthly economic indicators meeting, the required measures of fit.