US consumption is the focus of two studies by Cleveland Fed researchers
U.S. consumption and its determinants vary across time periods and geographic locations, says Cleveland Fed study
U.S. households’ consumption of goods and services has gone through steep ups and downs since the turn of the millennium. A study by Federal Reserve Bank of Cleveland researcher Yuliya Demyanyk et al. examines the relative impact of nine significant determinants of consumption growth. The study finds that the explanatory power of these factors varies by time period and geographic location, which has important implications for economic policy.
The study examines consumption at the county level in each of four time periods: the dot-com recession (2001-2003), subprime boom (2004-2006), Great Recession (2007-2009), and tepid recovery (2010-2012). It finds that consumption growth rates vary across time periods and across states, as well as within states.
Looking at the determinants of consumption growth, Demyanyk and her co-authors find that unemployment and debt explained a large fraction of the variation in consumption growth across all counties throughout the entire 2000-2012 period. However, the contribution of other factors varied by period. For example, the researchers note that the third most important factor in terms of variation explained in the dot-com recession was the share of income received by the top 10 percent of households: counties with more high-income residents weathered the dot-com recession better and therefore experienced smaller declines in consumption. Consumer confidence helped fuel consumption growth in the subprime boom, while the loss of housing wealth helped explain the large decline in spending in the Great Recession. The growth of cash-out refinances stimulated consumption in the tepid recovery.
Understanding the relative importance of these factors could have important implications for economic policy, say the study’s authors. For example, if indebtedness explains a large fraction of the variation in consumption, an interest rate policy that lowers debt service may be a powerful stabilizer, but if unemployment is more important for consumption growth, fiscal policy in the form of increased public purchases may be more effective.
Cleveland Fed researcher looks at changes in consumption patterns since the Great Recession
According to LaVaughn Henry, vice president and senior regional officer of the Federal Reserve Bank of Cleveland’s Cincinnati Branch, the Great Recession caused declines in the absolute level of households’ consumption and increases in the relative share of income going to purchase necessities relative to luxuries, in spite of higher rates of price inflation for necessity goods relative to luxury items. However, Henry also notes that these results vary by age group.
Henry says that all age groups experienced growth in their real incomes from 2000 to 2007, and then, with the exception of the oldest group, real incomes fell between 2007 and 2013. The greatest decline occurred in the youngest age group, those under 25 years old.
For households in general, the proportion of income going to the consumption of necessities declined from 2000 to 2007. With the onset of the recession in 2008, the trend reversed, and the share of necessities purchased rose. Meanwhile, the average consumption share for luxuries declined only slightly.
Between 2000 and 2013, price growth for luxuries was 1.9 percent, necessities, 3.8 percent. Given the higher price inflation for necessities, Henry says one should expect to see a shift toward luxury consumption. While the share of income going toward luxury consumption did increase in the pre-recession period, the share going toward necessity consumption in the recession and recovery period was the most resistant to change.
Younger people were the most affected by the slow income growth and the rising prices of necessity goods, according to Henry. During the recovery, people 44 and younger increased their consumption of necessities relative to luxuries. Middle-aged people, 44-54, were the most invariant, holding their consumption mix relatively stable relative to the pre-recession period, while those 55 and older were the most likely to continue increasing the percentage of their income allocated to luxury consumption.
Henry says these trends are in stark contrast to the long-term reduction of necessity consumption across all age groups prior to the recession. The degree to which this development is or will become permanent has yet to become obvious, but if it were to become permanent, Henry says it could materially impact production patterns in the future.
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
Doug Campbell, email@example.com, 513.455.4479