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Daniel Carroll |

Research Economist

Daniel Carroll

Daniel Carroll is a research economist in the Research Department of the Federal Reserve Bank of Cleveland. His primary research interests are macroeconomics, public finance, and political economy. Currently, he is studying the implications of progressive income taxation for the distributions of wealth and income.

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07.06.12

Economic Trends

Durable Goods Consumption and GDP

Daniel Carroll

The most recent information on durable goods consumption has remained positive. In real terms, the series rose 2.4 percent in the first quarter of 2012 and 4.1 percent year-over-year. Relative to nondurables and services, the other broad subcategories of consumption, durables is small, on average about 12.7 percent of total consumption over the past 30 years. Nevertheless, forecasters pay attention to the direction of this subcategory.

One reason that economists watch durable goods consumption is that it leads GDP over the business cycle. When durable goods consumption is above its trend, GDP one quarter ahead will more often than not also be above trend as well. While this is not a sure sign, it is one indicator about the future path of GDP.

One reason why durable consumption leads GDP may be the size of durable goods. Goods like cars, appliances, and furniture tend to have larger sticker prices than gallons of milk or haircuts. In recessions, households put off replacing or updating their durable goods, waiting for positive signals of their future income. It is safe to assume that individuals get information for their own income growth before economists do.

Unfortunately, households’ expectations of their future income does not look too rosy right now. Since late in the recession, the median household expectation for its income growth over the next year has been near zero, and the most recent numbers are barely up. Nevertheless, durable consumption has risen in real terms over the period. The disconnect between these two observations may be a result of statistical complexities. It may be that the household with the median expectation is not the same as the household with the median income. If the middle household in the income distribution has a more positive outlook for income, its durables consumption could well be higher, which would push up durables consumption overall.

Another possibility is that households with access to credit have been taking advantage of the low interest rate environment, and this has been keeping durable consumption up. This explanation is supported by data on consumer credit, which has risen to levels typical before the financial crisis. Meanwhile, other major sources of credit such as mortgages, home equity loans, and home equity lines of credit continue to remain low.

Moving forward, economists will continue to look to durable consumption as one signal of where the economy is heading.