Even Finance-Conscious Consumers Spend Swiftly After Payday – Real Time Economics

Americans step up their spending after payday—no surprise—but it’s not because the cash is burning holes in their pockets, a new study found.

In a paper to be published Friday in Science, researchers found that close to half of increased spending in the days after Americans receive pay or benefit checks comes from recurring payments such as rent or mortgage bills. In contrast, spending on fast-food or coffee treats increased only modestly in the few days after Americans are paid.

The research helps explain a longstanding economic puzzle: Why do consumers with regular and predictable sources of income have so much volatility in their spending habits?

Theory would dictate that if people know they take home $1,000 every two weeks, they should be equally as likely to spend that money on any day between payments. Instead, spending spikes in the first days after a payment is received.

Essentially the new study finds that Americans’ uneven spending habits aren’t because they’re living hand-to-month, but rather because many carefully plan their finances and make big payments when they have the most cash.

“That’s not irrational,” said University of Michigan economist Matthew Shapiro, one of the paper’s authors. “That’s sensible cash management.”

Researchers counted “recurring payments” as bills of the same amount paid on a regular frequency. When accounting for regularly occurring debts that vary in size, such as utility and credit card bills, it’s likely that even more of the spike in spending is due to timing of payments rather than shopping splurges, he said.

As interesting as the findings is how the researchers mined the data. They analyzed aggregated figures from Check, a smartphone app that tracks account balances.

With that information, they could review transactions nearly in real time, rather than waiting weeks or months for government reports. Researchers also could easily compare the spending habits of users that receive payments on different days.

Other efforts, including Price Stats and Premise Data Corp., have explored the use of real-time data to track changes in prices and other economic benchmarks. It holds the promise of providing investors, economists and policymakers with quicker and potentially more-accurate information.

Such “naturally occurring data” could ultimately be cheaper and easier to collect than figures derived from traditional surveys conducted by the Census Bureau and other agencies, Dr. Shapiro said.

In the future, rather than conducting a lengthy survey, agencies could invite respondents to use an app to collect income and spending figures. Then they could ask a narrower series of questions about expectations and preferences.

Real-time data does face challenges. For example, the data analyzed for the Science paper was collected from those regularly using smart phones and computers. It also skewed more toward males and those age 25 to 44, compared with the Census Bureau’s American Community Survey.

Mr. Shapiro said the Check data included a broad enough cross section of the population that researchers could apply the results widely. Still, he doesn’t expect naturally occurring data to someday replace the Labor Department’s jobs report.

Rather, he sees it as a supplement. Tapping other sources of data could add new contours to researchers’ understanding of the economy.

“People are getting increasingly reluctant to respond to surveys, and income and assets can be hard to measure on those surveys,” he said.



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Source: blogs.wsj.com

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