LARKSPUR, Calif.—A new study suggests that a mere 5% reduction in personal consumption brought by fear of terrorism is enough to push the U.S. economy into the next recession.
“Acts of terror promote economic uncertainty and financial anxiety in people, who instinctively react by reducing spending,” said Dan Geller, a financial behavior scientist. “A 5% reduction in personal consumption, which makes up nearly 70% of the U.S. economy, will decrease gross domestic product by 3.5%, or negative 1.4%, based on the 2015 third quarter GDP of 2.1%.”
Geller explained that terrorism impacts the economy in two distinct ways.
“The first is the immediate impact on commerce right after a terror attack. The November terror attack in Paris de facto paralyzed commerce for a few days in parts of Paris and later on in the entire city of Brussels, Belgium,” he said. “Repeated economic disruptions like these can have severe economic impact on local and national economies.”
The second economic implication of terror acts is in elevating financial anxiety in the aftermath of every terror attack, Geller said.
“The terror act of September 11, 2001, immediately increased the level of money anxiety of people in the U.S.,” said Geller, who assembles the Money Anxiety Index—which measures consumers' level of financial worry and stress. “In the month of the attack, September, the Money Anxiety Index jumped 5.1 points from 56.9 in the previous month and continued to climb up nearly 21 points when it peaked at 77.6 on December of 2001.”
Research conducted by Money Anxiety shows that fear and uncertainty are the main triggers of financial anxiety.
“When the level of money anxiety increases, people tend to react instinctively by reducing their spending and increasing their savings. This is a normal reaction of the reptilian part of the brain to ensure survival and self-preservation,” said Geller.