Consumption Taking Longer to Respond to Downturns in GDP
Consumption makes up roughly 70 percent of GDP as measured by the National Income and Product Accounts. The consumption category as a whole tends to follow overall GDP fairly closely over the business cycle, but the three main subcategories of consumption—durable goods, nondurable goods, and services—differ considerably in their relationship to GDP over the cycle. For instance, durable goods consumption is by far the most volatile, while services consumption is very smooth. A closer look at the behavior of these three subcategories over the past four recessions suggests that some changes in the behavior of the subcategories is affecting consumption overall. Specifically, it suggests that aggregate consumption is taking longer to respond to declines in GDP, and that this is likely due to the large and rising share of the services category in overall consumption.
The behavior of aggregate consumption in response to the downturn in 1981 was an immediate, sharp decline of 1 percent followed by a gradual rise over the next year. In the final quarter of the recession, consumption was already about 2.4 percent above its pre-downturn level. The 1990 recession had a similar response although the initial decline in consumption was more subdued and it took an additional quarter for consumption to reach its trough. In addition, consumption had not yet returned to its previous high by the official end of the recession, and it took another three quarters to reach its previous peak. Consumption during the 2001 recession had a curious pattern in that it continued to grow (albeit at a much reduced rate) throughout. During the Great Recession beginning in 2007, consumption behaved more like it did in the 2001 recession than in the previous ones. It rose for two periods as GDP declined, only falling below its 2007 peak after three quarters. During the remainder of the recession, however, it declined precipitously.
The cause for the delayed response of consumption can be identified by examining the three principal subcategories of consumption. Turning first to durable goods, this consumption series has fallen immediately in each of the four recessions studied. The volatility of the category is also apparent. For instance, at the end of the last recession durable goods was almost 18 percent below its peak level, while aggregate consumption was down only about 5 percent.
Durable goods consumption also takes a while to recover. Only in the 2001 recession did it rise above its prerecession level before the end of the downturn. In response to a fall in income, consumers are quick to hold off on large expenditures like automobiles, TVs, and furniture, and they put off those purchases until there are strong signals that the economy is beginning to recover. Overall however, the behavior of durable goods does not stand out as the reason for a more lagged response of aggregate consumption to recessions.
Nondurable goods consumption, which includes commodities like food, clothing, and gasoline, does display lagged behavior, typically taking a quarter or two to decline below its peak level. Beginning with the 1990 recession, each recession took an additional quarter for nondurable goods consumption to fall below its peak.
Nevertheless, it is not likely the chief cause of the growing lag in aggregate consumption. This is because nondurable goods makes up a minority share of total consumption, and this fraction has been shrinking over time, falling from 32 percent to 23 percent over the sample.
In contrast to the other two categories, services make up a large and growing share of total consumption, at 55 percent in 1981 and 66 percent in 2011. Taking these shares as weights, a 1 percent change in services is equivalent to more than a 6 percent change in durable goods. It stands to reason that the behavior of services consumption is playing a major role in determining the course of aggregate consumption.
Examining the paths of services over each of the four recessions, it becomes immediately apparent that this component of consumption is much less responsive to downturns in income. With the exception of the last recession, services consumption has remained above its prerecession level throughout each downturn. Services then acts as a ballast, pulling up on total consumption even as other components drag consumption downward. As aggregate consumption becomes more heavily weighted toward services, the time between GDP’s initial fall and the response of aggregate consumption is extended.