The Changing Composition of Consumption
It is no secret that some households are being hit hard in the current recession. Nonfarm payroll employment is down about 3.5 percent over the last year. Real personal income is down 0.3 percent over the same time period. Both of these phenomena are fairly typical of a recession, but in this recession they are particularly severe. The ongoing job losses, lower housing wealth, and tight credit of this financial crisis have led to some abrupt shifts in household consumption behavior.
The most prominent shift is that the personal saving rate leaped to over 4 percent from nearly zero in this recession. It did so temporarily when the first stimulus checks hit households in May 2008, but jumped up again, apparently more lastingly, after last fall’s financial fireworks. While for years financial advisors have urged Americans to raise their personal savings rate, such a quick shift has had jarring effects elsewhere in the economy.
A related shift, driven by increased saving and the flat growth in real personal income, is a highly unusual drop in consumption. In the last recession, the growth in real personal consumption expenditures slowed but did not fall below zero. Real personal consumption expenditures (PCE) fell 3.8 percent and 4.3 percent in the last two quarters of 2008. It has since rebounded, expanding 2.2 percent in the first quarter of 2009.
Not only has consumption declined in this recession, but its composition has shifted as well. Looking at monthly data, the durable goods component (14 percent of PCE) has plummeted and is currently down over 8.4 percent from a year ago. Nondurable goods (about 28 percent of PCE) have slowed less, but they still declined an unusual 3.8 percent. Only services (58 percent of PCE) have managed to eke out a positive gain (0.9 percent).
The clear pattern is that consumers are saving by deferring consumption wherever they can, but this is easier to do with long-lived durable goods and less so with services. For example, households can delay replacing their cars (a durable good) without too much difficulty, but deferring oil changes (a service) is not as wise. A consequence is that auto repair shops and other service providers that extend the life of goods are faring better than manufacturers of new goods.
Looking at the components of durable goods, it should surprise no one that motor vehicles and parts (31 percent of durable goods) have been particularly hard hit. They are currently down about 17.2 percent year-over-year. Furniture and household equipment (54 percent of durable goods) has born up better and is essentially flat year-over-year.
All the main categories of nondurable good—food, clothing and shoes, and gasoline, fuel oil, and other energy goods—are down in this recession. Note the nondurable category “food” (46 percent of nondurables) includes restaurant meals, so food’s 5.3 percent year-over-year decline does not mean people are eating less, just that they are eating out less often and spending less when they do.
Although services have fared better, some have performed better than others. As typically happens in a recession, medical care (nearly 30 percent of services) has held up fairly well—it’s currently up 2.5 percent year-over-year—but it is not performing as well as in previous recessions. With many households securing their health insurance through their employers, the heavy employment losses in this recession have had an adverse effect on coverage and ultimately care and treatment. Real expenditures on recreation (7 percent of services) dropped early in this recession but are currently up 0.2 percent year-over-year. Transportation services (6 percent of services) continue to take it on the chin, dropping over 5 percent over the last year.
How permanent will the shifts toward saving and thus slower consumption be, particularly for durable goods? While the life of durable goods can be extended, albeit at the cost of higher maintenance, at some point they have to be replaced. A higher savings rate is likely to persist, but demand for durable goods is likely to rebound at least partially. Having been burned once, households may be reluctant to spend as much on housing and autos as in the past.