Sentimental Business Cycles and the Protracted Great Recession

Using newly licensed individual-level data from Gallup between 2008 and 2017, this paper provides microeconomic evidence that sentiments about economic activity played an important role in amplifying and propagating the Great Recession. First, exposure to different local shocks influences economic sentiments: a one percentage point rise in county employment and housing price growth is associated with a 0.24-0.57 and 0.21-0.40 standard deviation rise in perceptions about the current state of the economy. These estimates are not driven by unobserved local shocks to consumer demand. Second, economic sentiments influences consumption and hiring decisions: a standard deviation increase in sentiments is associated with a 0.06% rise in daily consumption of non-durables and a 0.17 standard deviation rise in hiring intensity. These estimates are robust to exploiting quasi-experimental variation in daily temperature as an instrument for sentiments and implementing a difference-in-difference estimator of around the 2016 Presidential election. A back-of-the-envelope calculation suggests that the decline in sentiment can account for 19.3% of the decline in consumption during the Great Recession.