Consumer Spending Reflects New Priorities after the Recession
Accounting for approximately 70 percent of the nation’s GDP, personal consumption expenditures represent the backbone of the American economy. During the current economic recovery, personal consumption has continued to expand despite modest and erratic income growth, high unemployment, higher taxes, and higher energy and food prices. Factors contributing to the consumer’s resiliency are many, with strong financial asset market performance, recently improving housing market conditions, and a slowly improving labor market all working to support growth in personal consumption.
At the end of the recession, personal consumption expenditures resumed growing at a positive average annual rate of 3.8 percent. Between the end of the prior recession and the beginning of the recent recession, it averaged 5.3 percent. During both recovery periods, disposable personal income grew at relatively slower rates, 3.3 percent and 5.1 percent, respectively. Additionally, the current recovery period has been characterized by slower growth in household asset values than in previous recoveries, and until recently, muted growth in house prices. However, despite consumers being somewhat constrained in their ability to draw from expanding income and wealth sources during the recovery, the growth in their consumption remains stronger than one might expect.
Since household asset values resumed their growth during the third quarter of 2009, they have increased an average of 5.5 percent through the third quarter of 2013. This compares unfavorably to the average annual growth rate of 8.4 percent experienced between the first quarters of 2002 and 2008. Much of the recovery that has occurred can be attributed to continued growth in equity prices. For example, since the end of the financial crisis of 2008-2009, equities have more than doubled in value. However, while this has benefitted the consumption of some households, it has not done so for the majority. By the end of 2010, only 20.4 percent of households held stocks or mutual fund shares as an asset class in their portfolio, and this was down from the 25.1 percent that held equity shares in 2005.
By comparison, the average American household is much more likely to have equity in their home than they are to own stocks. At the end of 2010, 65.9 percent of households had equity in their homes, with a median value of $80,000, as compared to the 20.4 percent holding equity shares with a median value of $18,300. Thus, the average household’s consumption is much more likely to respond to growth in house prices, which would increase the value of their equity, than they are to growth in stock prices. Unfortunately, home prices did not begin to appreciate until fairly late in the recovery, and the ability of homeowners to access the equity in their homes through equity borrowing has been much reduced relative to pre-recession levels.
While improvements in the values of both asset classes have, to differing degrees, helped to support growth in personal consumption expenditures, there have also been shifts in the composition of the average household’s asset portfolio that have likely worked to slow growth in consumption. Most notably, consumers have been using their income to partially pay down debts built up before the recession while at the same time they have also been saving more in relatively illiquid savings accounts such as 401ks and IRAs. On net, as they have saved more, growth in their current consumption is below what it otherwise would have been.
As personal consumption has recovered, there have also been shifts in the types of things that households are consuming. Most notably, the consumption of durable goods has picked up at a relatively faster rate than either nondurables or services. Prior to the recession, durable goods consumption grew 3.8 percent a year on average, but since the end of the recession it has grown 4.7 percent. The durable category showing the greatest strength is motor vehicles and parts, which increased from an average annual growth rate of 3.8 percent before the recession to 7.7 percent after. This growth is the joint result of pent-up demand for new autos—the average age of cars on the road has increased to 11.4 years from a pre-recession average of 9.2 years—and continued historically low interest rates on new and used auto loans. By way of comparison, households’ consumption of services grew 5.6 percent a year on average before the recession and declined to 3.2 percent during the recovery period.
The average American household is facing a very different landscape than it was prior the Great Recession of 2008-2009. Fiscal restraint and uncertainty, slowly declining yet still-elevated rates of unemployment, modest growth in disposable personal income, and modest growth in household asset values have all combined to slow the rate of increase in personal consumption expenditures during the recovery.
However, while these forces have slowed the growth, they have not reversed it. Consumers are spending more, but more notably, their consumption preferences have also appeared to change. Consumers appear to be more focused on consuming based on need versus want; durables that yield value over the long term such as cars, furniture, and other household equipment, have eclipsed growth in temporary service-based consumption such as food services and accommodations. Whether or not these compositional preference shifts remain or reverse throughout the recovery period remains to be seen, but if they do remain, they will have implications for future trends in labor, production, and the overall growth in the economy.