The Shape of Consumption

I’ve recently suggested in a tongue-in-cheek manner, but not really kidding about it, that our consumption culture may itself be a bubble. I called it a Superbubble, maintained by a no longer justified confidence in the future, encouraged by advertising, easy credit, and other features of the Me-Me-Me society. But has that bubble been pricked by the mortgage bubble’s pop—and the financial meltdown that followed? I thought I would look for some indicators. The data graphed here comes from the Bureau of Economic Analysis (link). If you want to keep me honest, follow menus until you locate Table 2.3.6.

The table offers data on consumption in chained 2005 dollars; inflation is thus removed. The major categories of consumption are then broken down further. The first chart looks at the big picture, total consumption and its three major parts:

The colored lines show actual dollars. The straight, thin, black lines are the trends of each curve. Trends in these series are, of course, dominated by the 1995-2005 decade, thus by results obtained before the Big One came. Thus it is interesting to see how close or how far away we are from the trend in last years of these series, thus from 2008 through 2010. On this graph the top line shows total consumption; the trend shows that we are underperforming it in recent years. Looking at the components that make up the total, we see that we fall below trend least in the non-durable goods category (where food, clothes, and gasoline reside); the gap widens a little more in durable goods (autos, refrigerators), and most in household services (here we have housing, health care, recreation, subscriptions, and the like).

One way to read this is that in the basic categories we hew close to trend, in discretionary categories we are easing off on our purchasing—thus changing the trend downward. Put another way, the more voluntary the purchase is, the more we have fallen behind the decade-plus trend formed by these data. Now let’s see how further disaggregation illustrates what we are seeing thus far. Let’s start with stuff we need on a more-or-less daily basis, the nondurables category.

We fall beneath trend in every category. The gaps from least to largest are food, gasoline, and clothing. The biggest gap appears in the miscellaneous category, “other” nondurables; in tht category, possibly, our discretion is greater. We have to eat; we have to fill the car.

In this chart, tracing the shape of Durables, we see the most dynamism—and a surprisingly sharp growth curve. Notice that gaps between actual expenditures and trends are rather dramatically higher—especially in the largest category (until 2006)—automobiles and parts. A big gap exists in furniture and equipment; “equipment” here includes refrigerators, dryers, disposals, and such. The small gap in the “other” category, unfortunately, is not explainable—precisely because we have no data on what all that bin holds. The surprise comes when we look at recreational durable goods and vehicles. This category has not only displayed a fantastic growth in the period but it is also—never mind the Great Recession—right on track with its own head-spinning rise. When it comes to boats, dirt bikes, snowmobiles, and yachts—No is not an Answer!

The last graph of the day shows all kinds of household services. Recall that this category showed the greatest gap between actual and trend on our first chart. This graphic shows us the detail. Every category underperforms its trend. The lowest gap, again, is found in the category where discretion is least: in healthcare. The medical profession wants to use “health care consumer,” but consumer we are not; not in the sense of voluntary. Food services and accommodation are also largely on trend; that speaks to our habits; we are habituated to our Big Macs or our Burger Kings. Another low gap comes in recreational services. Recreation seems to trump any impulse to save our dough in honor of the Great Recession. The biggest gap appears in financial services. People have stopped or cut back on their investment activities. That’s not surprising. Housing and utilities—and that one is important because it is the largest category of expenditure—shows a deviation downward. So does “other” services—but we can’t easily discover what all that includes. I further note that people buy fewer airplane tickets, bus tickets, or both.

I wish we had data with better resolution. The question I have posed but cannot as yet answer is: Are people waking up, finally, scared to death by the mortgage melt-down and the evaporation of employment so that they will stay frugal? As in permanently? Or is this just the bottom of a Krazy-Ride-Rollercoaster and soon, to a collective sigh of relief, the little cart will start zooming to the sky again—only to come hurtling down once more? There is a paradox here, of course. We seem to require the Mad Consumption way of life to employ everyone. Unless we’re willing to kiss globalism by-be-bye and fall in love with tariffs again. As Market Size blog showed a day or so ago, the Paper Clip People have managed to get tariff protection. The Paper Clip People? Why not the rest of us?

Government’s Prayer: Please Consume!

The Federal Reserve Bank yesterday announced, although with some demurrals, that it would keep the interest rate at zero or near zero into 2013. Why? Because the governors want people to invest. But does investment drive growth—or is it the other way around? What low interest rates signal is that cheap money will be available—and the markets liked that message. The Dow rebounded as soon as traders actually grasped this fact.

In his last speech President Obama urged renewal of the payroll tax cut (on which more here) into 2012. Why? Because he believes that the economy needs stimulus. Thus a few more dollars in the pockets of consumers will make them go out and consume. Other Keynesian economists wring their hands because huge budget cuts and a debt ceiling that must be lifted like every quarter from now on (it seems) against huge opposition, signals that stimulus will not flow. The prevailing view here is Paul Krugman’s: Stimulate and then, when things are up and running again, then worry about deficits.

This made me curious about consumption. Just how are we doing on the spending front. Herewith a graphic that shows Personal Consumption expenditures from 1990 through the second quarter of 2011.

The chart is rather informative. We’ve had three recessions in this period. As the curves show, personal consumption did not flag through the first two. At most, in two of its subcategories (nondurable and durable goods) it flattened just a little. But in the Great Recession, another story. There we see a quite visible dip in consumption overall as well as in every subcategory. But since the last one ended, consumption has resumed—if, to be sure, from a new low. The one exception is durable goods.

On this chart you see markers and numbers showing personal consumption in the second quarter of 2007, thus a time when things were still normal. The numbers at the extreme right show consumption in the second quarter of 2011, the last data point charted. They are all higher than the values clocked in the corresponding quarter of 2007 except durable goods. That category has not recovered and is still below the 2007 level. Negative growth.

Now it is interesting to note that in 2011 32 percent of that category is motor vehicles and parts, and that that sub-subcategory had the most negative results of all. In 2007, motor vehicles/parts represented 33.9 percent of expenditures. Two other categories, furnishings and household equipment and recreational goods and vehicles were also negative. The only redeeming sub-sub was other durable goods not further detailed.

Gasoline and other energy goods fall within the nondurable category. You have to have gasoline. In 2011, compared to 2007, people spent less on food and clothing and footwear and more on gasoline and other nondurable goods. In the services category, shifts between sub-sub categories were toward more expenditures on health care (the largest increase) and on food services and accommodations (eating out, in other words). All other categories, including the largest, housing and utilities, lost share.

We see significant and interesting shifts in categories. In the durables category, people are not buying cars, appliances, and furniture. In the nondurables category, gasoline dominates the picture. In services health care—a sector that is showing job growth—is the important category.

But what Personal Consumption expenditures exclude is purchases of housing (except rentals). The odd thought occurs: Is owning the family home the real root of the American Dream? And is the appreciation of that property the root of confidence? And when that sector starts tottering, does a rude awakening from the Dream cause people to purchase what they need—and not much more than that?

And that in turn suggests another thought. If the home has lost its value (never mind if you actually lost your home), does that improve your credit? And how much of the growth in durables depends on credit? Most of it, it seems to me. People are having problem borrowing, and this despite a financial market awash in cash. Why? The lenders have also been chastened. All of these factors play a role especially in the durables category—the category where jobs are not growing with any visible vigor at all.

The data shown here are available from Table 2.3.5 of this BEA source.