Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Consumption Growth Regimes and the Post-Financial Crisis Recovery

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Consumption Growth Regimes and the Post-Financial Crisis Recovery

Article excerpt

The financial crisis and recession of 2007-09 hit household balance sheets hard and resulted in large numbers of job losses. Diminished wealth and income, high unemployment, and a stagnant labor market-in combination with tight borrowing and lending conditions-made it difficult for households to increase consumption as rapidly as they had just a few years earlier. After the Great Recession, consumption has grown more slowly than in the recoveries from previous recessions, suggesting a fundamental shift in the economy.

Consumption growth reflects a variety of both persistent and transitory factors. Shifts in underlying factors such as labor markets or financial conditions can persistently change the speed and volatility of consumption growth; other determinants of consumption such as weather or temporary tax changes can have transitory effects. Characterizing consumption growth during the recovery as being due to either persistent or transitory factors can help determine exactly how the recovery differed from previous ones. If the factors driving consumption growth are fundamentally different now from the past, previous recoveries may no longer indicate how the economy might rebound from recessions. But if the factors driving consumption growth are not too different, previous recessions still may provide insight into how consumption growth may evolve.

In this article, we compare consumption growth's historical behavior with its behavior during the recovery from the Great Recession. We conclude that the slow growth was due not to a shift to previously unseen behavior, but rather the continued influence of persistent factors that are unusual to see outside recessions. While durables and nondurables consumption behaved much as they did during previous recoveries, both total and services consumption saw an atypical continuation of recessionary behavior during the recovery. If the recessionary behavior had not continued, the United States would have had higher total and services consumption throughout the expansion. Section I presents a graphical analysis of consumption growth after recessions. Section II presents a statistical model demonstrating that growth of total consumption and its components did not behave differently during the recovery but merely returned to previously seen behavior. Section III uses the statistical model to highlight that while factors driving consumption growth in the previous recovery mimicked those in history, their behavior in the cases of total and services consumption was unusual for periods immediately after recessions.

I. A Graphical Perspective on Consumption Growth after Recessions

One method for gauging the speed of recoveries involves graphing and comparing normalized consumption series across several recessions. This method indicates the relative speeds of consumption growth and its components after recessions and suggests that the slow recovery in total consumption from the 2007 recession was primarily due to sluggish services growth.

A graphical perspective of consumption growth

Graphs comparing the paths of total consumption across different recessions can illustrate, by historical standards, how normal or abnormal growth was after the 2007 recession. Chart 1 displays real consumption series for the last four business cycles.1 Panel A shows these series normalized to equal 1 in the quarter of the previous expansion's peak, which represents the start of each recession. Panel B shows a similar graph with the series normalized to equal 1 in the quarter of each recession's trough, which represents the end of each recession. Normalizing the series at two different points in the business cycle allows the panels to show different perspectives on how consumption behaved during and after the recessions. In both panels, the slope of the lines indicates the growth rates over each business cycle, with steeper slopes indicating faster growth rates. The level of the line accumulates these growth rates to show the relative size of consumption. …

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