Consumption Sensitivity of Unsure Households

Gizem Kosar and Davide Melcangi

Uncertainty is a key element of on a regular basis financial selections of customers and, maybe not surprisingly, it performs a central function in financial fashions. Based on financial concept, forward-looking customers depend on their expectations and perceived uncertainty when making financial selections. However, measuring the uncertainty that households truly understand, and the way it impacts client conduct, is difficult. The probabilistic nature of the Survey of Client Expectations allows us to make progress on this topic and to assemble household-specific time-varying uncertainty. In our current Employees Report, we empirically present that the marginal propensity to eat (MPC) is growing and concave in perceived uncertainty. This novel empirical proof poses a problem for the traditional consumption-savings mannequin with incomplete markets. 

Measuring Perceived Uncertainty and the MPC

In our empirical evaluation, we use information from the New York Fed’s Survey of Client Expectations (SCE). A novel function of the SCE is using probabilistic questions. For outcomes that may take a spread of values, resembling earnings progress, this suggests eliciting respondents’ full density forecasts.  

Within the context of earnings progress, respondents within the SCE are requested to consider their earnings twelve months from now, conditional on working in the very same job on the similar place they at the moment work, and dealing the very same variety of hours. They’re then requested to assign chances to their twelve-month-ahead earnings progress falling into every of a pre-determined set of bins, resembling their earnings in twelve months lowering by 2 to 4 p.c, or growing 4 to eight p.c, and many others.

Utilizing this data, we outline perceived earnings uncertainty as the usual deviation of the distribution that arises from these chances. Intuitively, respondents who put constructive—and dispersed—chances on numerous outcomes are extra unsure about their future earnings progress. In a separate query, respondents are additionally requested about their future spending progress: we assemble, in a similar method, a measure of perceived spending progress uncertainty.

As a result of it’s drawn from family expectations, our measure of uncertainty is an efficient gauge of the uncertainty that impacts customers’ financial selections. Furthermore, we’re capable of measure perceived uncertainty not solely on the particular person stage, but additionally over time, as respondents take part within the SCE for a number of months. 

The MPC can also be measured straight, by asking respondents within the SCE about their conduct within the face of a hypothetical earnings windfall. They reply by reporting what fraction (out of 100) of this earnings shock they might spend, save, or use to pay down debt. The quantity the respondents report they might spend is what we use because the MPC. 

Uncertainty and the MPC Throughout Households 

Since we observe MPCs and perceived uncertainty for every particular person and over time, we will present novel and intensive empirical proof on their empirical affiliation. We begin by displaying how these two objects are associated throughout all observations in our pattern. As an instance, the chart under bins our roughly 17,000 observations in quantiles representing a roughly equal share of observations. 

The MPC Is Rising and Concave in Perceived Earnings Development Uncertainty

As proven within the chart above, for the overwhelming majority of the observations, there’s a constructive affiliation between the MPC and perceived earnings uncertainty. Which means that extra unsure households have greater MPCs. When perceived uncertainty turns into very giant, nonetheless, the connection bends. 

We then check this correlation extra formally, regressing the MPC on uncertainty (and its sq., to permit for nonlinear results), whereas controlling for numerous elements which may confound the connection. We report the regression estimates within the desk under.

The MPC is growing and concave in uncertainty even once we management for demographics, anticipated earnings progress charges, time dummies, and web liquid wealth over earnings. In our Employees Report, we present that the connection is strong to a lot of controls and elements, in addition to to completely different measurements of the MPC and uncertainty. 

MPCs are, nonetheless, statistically uncorrelated with uncertainty when controlling for particular person fastened results, that’s once we concentrate on within-person modifications. This means that, on the particular person stage, modifications in perceived uncertainty are usually not considerably related to modifications within the MPC.  

This outcome means that the connection we uncover is primarily pushed by variation between households. As we talk about intimately in our Employees Report, we additionally discover that many of the variation in uncertainty is between households—quite than inside households over time—and is basically unexplained by the family traits that we observe within the SCE. 

Our dataset additionally allows us to research patterns related to spending progress perceived uncertainty. We discover that this kind of uncertainty is giant, suggesting that households doubtless face related dangers not particular to the labor market, resembling well being points, having a toddler, and many others. Furthermore, we discover that MPCs are additionally growing and concave in spending progress perceived uncertainty, as we present within the chart under, which once more represents a binned scatterplot. 

The MPC Is Rising and Concave in Spending Development Perceived Uncertainty 

Implications for Consumption-Financial savings Fashions

The truth that extra unsure households show a higher MPC poses a problem for the traditional consumption-savings mannequin with incomplete markets, as we present in our Employees Report. Within the mannequin, greater uncertainty prompts households to interact in precautionary financial savings and accumulate liquid wealth. On this class of fashions, greater wealth is related to decrease MPCs. Because of this, MPCs fall with uncertainty throughout households within the mannequin.

Our evaluation exhibits that we may have substantial deviations from the canonical mannequin to reconcile our empirical findings. One choice is to depart from a framework with full data and rational expectations. An instance is a setting the place households misperceive the true extent of the earnings threat they face. Alternatively, theories of bounded rationality may very well be per what we observe within the information. These fashions can generate giant MPCs for all households, together with these with excessive liquidity, and likewise cut back wealth accumulation within the face of threat. In our Employees Report we present that each forces, collectively, can generate MPCs that don’t fall with uncertainty.

Gizem Kosar is an financial analysis advisor within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

Davide Melcangi is a analysis economist within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

 @article{
        KosarMelcangi2025,
        creator={Kosar, Gizem and Melcangi, Davide},
        title={Consumption Sensitivity of Unsure Households},
        journal={Liberty Road Economics},
        notice={Liberty Road Economics Weblog},
        quantity={October 14},
        12 months={2025},
        url={https://doi.org/10.59576/lse.20251014}
    }