Consumer Psychology, Economy Forever Linked

The bad economic news continues.

The Federal Reserve Bank of Boston says in a new report that half of the manufacturers in the region have cut jobs or scaled back hours in the last three months.

Consumer spending nationwide is also in the doldrums, down significantly in the last year, despite a slight increase in January.

In Massachusetts, it plummeted about 11 percent in the fourth quarter of 2008 according to the UMass Donahue Institute.

In Downtown Boston yesterday a few people told us why they're cutting back.

Consumer 1: Some kinds of spending that are optional I'm cutting back on. I'm kinda gearing up for what's down the road if the stimulus package doesn't work.

Consumer 2: I have been cutting back on spending just because of how the economy is. People losing their jobs and family-wise and school. It's definitely getting tighter in terms of getting funding for all those things."

To learn more about the link between turning around the bad economy and the psychology of consumer spending, we turn to Drazen Prelec, a professor of management science at MIT's Sloan School of Management where he teaches a course on psychology and economics.