October 6, 2022

Economix: Looking Inside the Consumer Bust



Thoughts on the economic scene.

A few commenters responded to my Sunday column by asking whether consumer spending had really declined all that much. A blog post by Jared Bernstein discusses this issue. The crux of the argument is this chart, showing that consumer spending does not make up a smaller share of gross domestic product than a few years ago:

Bureau of Economic Analysis, via Haver Analytics

There are three reasons, though, why it’s a mistake to read this chart as saying there has not been a consumer bust.

First, consumer spending has retained its G.D.P. share because G.D.P. has done so poorly. It is only marginally higher than it was in late 2007, more than three years ago. Which is to say that consumer spending is only marginally higher than it was three years. As Mr. Bernstein explains, “the fall in consumer spending is proportionate to the decline in G.D.P.” In the more than 60 years that the government has been keeping records, consumer spending has never had a weaker three-year period than in this downturn.

Second, the government’s definition of consumer spending is not the same definition the rest of us would use. The government largely excludes house purchases for consumer spending. If you were to add spending on new homes to the official version of consumer spending — call it “spending by consumers” — the category’s share would be down significantly. The following chart understates the case — because it focuses on spending on newly built homes and misses much of the spending on so-called existing homes, which make up the majority of home sales — but it makes the case nonetheless:

Bureau of Economic Analysis, via Haver Analytics

Third, all of these consumer-spending numbers include staple goods and services that many families cannot go without, like food and health care. Spending on these staples has continued to rise over the last few years. Spending on groceries and utilities have both risen slightly faster than overall consumer spending. Spending on health care services (up 7.9 percent since late 2007, even after adjusting for inflation) and pharmaceuticals (up 5.5 percent) have risen considerably faster, according to data from IHS Global Insight. If you took out these staples and instead focused on discretionary consumer spending, you would see bigger declines still.

In the paper, we reproduced a version of the Federal Reserve Bank of New York’s powerful chart on discretionary service spending, which has dropped more than in any previous recession on record.

Having said all this, I do think the commenters are pointing to something important. Despite the consumer bust, consumer spending — as it’s defined by the government — remains near an all-time high. It also remains much higher than in other rich countries. I’m not sure that will always be the case, which means that the future of consumer spending probably isn’t very bright, either.

Article source: http://feeds.nytimes.com/click.phdo?i=7d11294d9ee84c4b822e020c38ee9979

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