Academic journal article Monthly Labor Review

Where Did We Indulge? Consumer Spending during the Asset Boom

Academic journal article Monthly Labor Review

Where Did We Indulge? Consumer Spending during the Asset Boom

Article excerpt

An analysis of where additional consumption occurred as household consumption rose substantially as a share of the economy over the three-decade period from 1980 to 2007, and especially during the "housing boom" of 1997-2007, reveals that wealth effects were particularly strong for spending on vehicles, vehicle services, and appliances

During the almost 30-year period from 1980 to 2007, consumer spending as a percentage of gross domestic product (GDP), or, simply, relative consumer spending, rose from 64.5 percent to 70.2 percent. In the latter part of the period, from 1997 to 2007, the increase was an especially rapid 4 percentage points. (1) Chart 1 shows relative consumer spending from 1929 to 2009. Researchers have attributed the increase seen in relative consumer spending since about the turn of the century--and the consequent decline in personal saving--to many factors: a rise in household wealth and asset values; (2) a relaxation of credit standards and of bankruptcy and penalties thereby incurred, together with an increase in the availability of credit; (3) a change in attitudes about credit and a reduced stigma attached to indebtedness; (4) government policies encouraging an expansion of credit to underserved households, particularly low-income households; (5) and more.

Although substantial research has been carried out on the determinants of aggregate consumer spending in recent decades, (6) there has been no comprehensive analysis of spending trends for individual consumer products and services. That is, if consumers did indulge in higher rates of spending in recent decades, what did they purchase? On what products and services did consumers most increase their spending? Further, if one of the driving forces behind the increased rates of spending was housing asset values--as many have claimed (7)--then what purchases of consumer products and services were most affected by this wealth effect? Also, if the housing wealth effect reversed during and after the 2007-2009 recession, what consumer products and services will most likely be adversely affected by the trend? To date, these questions have not been answered in a rigorous analytical way.

An investigation of the foregoing issues is important not just from a historical perspective, but even more so, for an understanding of how consumer spending is changing and how it may change in the future. Some analysts say that the recession of 2007-2009 is prompting a complete alteration of consumer financial behavior, (8) given that household asset values have not returned to prerecessionary levels. Households are therefore being forced to pay down on debt, increase saving, and moderate spending in order to rebalance their financial sheets. If these trends take hold, then the boom in consumer spending that occurred prior to the recession may turn into a bust for some consumer products and services. It would therefore be useful to investigate where the reduction in consumer spending might occur.

This article presents such an investigation at two levels. First, at the aggregate, or macro, level, the article tracks the changes in spending in major consumer product and service categories during the consumption boom. This analysis provides a first cut at understanding the broad, turbulent changes in consumer spending that took place in recent decades.

However, in order to isolate the wealth effects emanating from household assets due to other factors determining consumer spending, such as prices, income, and demographic characteristics, the article presents a second, microlevel analysis. Here, the determinants of consumer purchases on 84 individual products and services are examined, to ascertain exactly where and why households indulged during the asset boom of the late 20th century. The results of this analysis can then be used to infer which consumer products and services most likely will be affected by the anticipated retreat in consumer spending in the postrecessionary period. …

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