Gizem Kosar and Davide Melcangi
Uncertainty is a key element of on a regular basis financial choices of customers and, maybe not surprisingly, it performs a central position in financial fashions. In response to financial principle, forward-looking customers depend on their expectations and perceived uncertainty when making financial choices. Nonetheless, measuring the uncertainty that households truly understand, and the way it impacts shopper conduct, is difficult. The probabilistic nature of the Survey of Shopper Expectations allows us to make progress on this topic and to assemble household-specific time-varying uncertainty. In our latest Employees Report, we empirically present that the marginal propensity to devour (MPC) is rising 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 knowledge from the New York Fed’s Survey of Shopper Expectations (SCE). A novel function of the SCE is using probabilistic questions. For outcomes that may take a variety of values, akin to earnings development, this means eliciting respondents’ full density forecasts.
Within the context of earnings development, respondents within the SCE are requested to consider their earnings twelve months from now, conditional on working in the very same job on the identical place they presently work, and dealing the very same variety of hours. They’re then requested to assign chances to their twelve-month-ahead earnings development falling into every of a pre-determined set of bins, akin to their earnings in twelve months reducing by 2 to 4 p.c, or rising 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 optimistic—and dispersed—chances on varied outcomes are extra unsure about their future earnings development. In a separate query, respondents are additionally requested about their future spending development: we assemble, in an identical method, a measure of perceived spending development 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 choices. Furthermore, we’re in a position to measure perceived uncertainty not solely on the particular person stage, but in addition 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 revenue windfall. They reply by reporting what fraction (out of 100) of this revenue 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 in depth empirical proof on their empirical affiliation. We begin by displaying how these two objects are associated throughout all observations in our pattern. As an example, the chart beneath bins our roughly 17,000 observations in quantiles representing a roughly equal share of observations.
The MPC Is Rising and Concave in Perceived Earnings Progress Uncertainty
Supply: Authors’ calculations from the New York Fed’s Survey of Shopper Expectations.
As proven within the chart above, for the overwhelming majority of the observations, there’s a optimistic affiliation between the MPC and perceived earnings uncertainty. Which means that extra unsure households have increased MPCs. When perceived uncertainty turns into very massive, nonetheless, the connection bends.
We then take a look at this correlation extra formally, regressing the MPC on uncertainty (and its sq., to permit for nonlinear results), whereas controlling for varied components that may confound the connection. We report the regression estimates within the desk beneath.
The Relationship Between the MPC and Uncertainty Is Pushed by Variation Between Households
(1)(2)(3)(4)(5)Earnings development uncertainty0.797***0.845***0.799***0.917***0.165(0.168)(0.180)(0.180)(0.334)(0.826)Uncertainty squared-0.076***-0.079***-0.076***-0.080***-0.040(0.014)(0.014)(0.024)(0.024)(0.061)Anticipated earnings growth-0.034-0.033-0.144*0.121(0.039(0.039)(0.080)(0.156)Controls √.√.√.√.√.Yr dummies√.√.Web liquid wealth over revenue√.√.Particular person fastened results√.Dep. var. mean16.65416.65416.65416.02816.078Adj. R-squared0.0170.0170.0190.0170.386Observations17,19017,19017,1904,0882,556Source: Authors’ calculations from the New York Fed’s Survey of Shopper Expectations.
The MPC is rising and concave in uncertainty even once we management for demographics, anticipated earnings development charges, time dummies, and internet liquid wealth over revenue. In our Employees Report, we present that the connection is powerful to numerous controls and components, in addition to to totally 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 deal with within-person adjustments. This means that, on the particular person stage, adjustments in perceived uncertainty will not be considerably related to adjustments within the MPC.
This end result 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—somewhat 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 analyze patterns related to spending development perceived uncertainty. We discover that any such uncertainty is massive, suggesting that households doubtless face related dangers not particular to the labor market, akin to well being points, having a toddler, and many others. Furthermore, we discover that MPCs are additionally rising and concave in spending development perceived uncertainty, as we present within the chart beneath, which once more represents a binned scatterplot.
The MPC Is Rising and Concave in Spending Progress Perceived Uncertainty
Supply: Authors’ calculations from the New York Fed’s Survey of Shopper Expectations .
Implications for Consumption-Financial savings Fashions
The truth that extra unsure households show a better MPC poses a problem for the traditional consumption-savings mannequin with incomplete markets, as we present in our Employees Report. Within the mannequin, increased uncertainty prompts households to have interaction in precautionary financial savings and accumulate liquid wealth. On this class of fashions, increased wealth is related to decrease MPCs. Consequently, MPCs fall with uncertainty throughout households within the mannequin.
Our evaluation reveals that we might 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 in keeping with what we observe within the knowledge. These fashions can generate massive MPCs for all households, together with these with excessive liquidity, and in addition 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.
Find out how to cite this publish:Gizem Kosar and Davide Melcangi, “Consumption Sensitivity of Unsure Households,” Federal Reserve Financial institution of New York Liberty Avenue Economics, October 14, 2025, https://doi.org/10.59576/lse.20251014
BibTeX: View | Obtain
@article{
KosarMelcangi2025,
writer={Kosar, Gizem and Melcangi, Davide},
title={Consumption Sensitivity of Unsure Households},
journal={Liberty Avenue Economics},
be aware={Liberty Avenue Economics Weblog},
quantity={October 14},
12 months={2025},
url={https://doi.org/10.59576/lse.20251014}
}
DisclaimerThe views expressed on this publish are these of the writer(s) and don’t essentially mirror the place of the Federal Reserve Financial institution of New York or the Federal Reserve System. Any errors or omissions are the accountability of the writer(s).