How do Expectations about the Macroeconomy A↵ect Personal Expectations and Behavior?⇤

Using a representative online panel from the U.S., we examine how people update their economic expectations and alter their economic behavior in response to changes in their macroeconomic expectations. We collect novel data on people’s subjective expectations regarding the probability of a recession and create exogenous variation in these expectations by providing respondents with di↵erent professional forecasters’ assessments of the likelihood of a fall in real GDP. We find that respondents strongly update their beliefs about the likelihood of a recession and future unemployment in response to the forecasts. People extrapolate from their perceptions of aggregate downside risk in the economy to their personal financial prospects and adjust their financial and consumer behavior as measured in a follow-up survey. The average adjustment in personal economic expectations in response to the forecasts masks substantial heterogeneity along the skill and earnings distribution and heterogeneity by personal unemployment experiences and subjective exposure to aggregate risk. Finally, people’s expectations about local unemployment, firm profits and interest rates respond to their macroeconomic outlook, but expectations about the probability of a recession do not causally a↵ect people’s inflation expectations.