A few years into the global financial crisis, US unemployment remains high and the economy still appears fragile. Nevertheless, American consumers appear to be returning to their old ways. For years they were seen as the engine of global growth. Their consumption drove exports in countries around the world. However, in the aftermath of the financial crisis, the unemployment rate in the United States soared to double figures, the collapse of property prices around the country eroded the wealth of many Americans and banks reined in their lending, while many borrowers cut their spending to pay down their debts. This appeared to set the scene for a change in the long-standing tradition of US consumer-led economic growth.
However, the latest personal consumption expenditure figures released a few weeks ago by the Bureau of Economic Analysis show another month of consumption growth in February. This is the fifth month in a row of strong personal consumption in the United States. Seen over the broad sweep of the last 50 years, the global financial crisis starts to look like a mere blip in an inexorable climb in personal consumption. (Note: the chart below uses a logarithmic scale so that a straight line indicates a steady rate of growth).
US Personal Consumption Expenditure (1959-2010)
Focusing on the last five years reveals that, while consumption collapsed in mid-2008, by the end of that year consumption began to recover. A little shakily at first, consumers appear to have returned to the pattern seen before the crisis and by late 2009, total personal consumption had exceeded pre-crisis levels.
US Personal Consumption Expenditure (2005-2010)
Looking at year-on-year consumption growth gives further insight into the underlying pattern. Growth peaked in the late 1970s, followed by a slowly declining smoothed trend* to growth rates just above 5% per annum. While the growth in consumption over the 12 months to February 2010 has not quite returned to the 5% level, that period includes weaker figures from early 2009. Annualizing quarterly growth over recent months gives figures back around the 5% mark.
Year-on-year Growth of US Personal Consumption (1959-2010)
This may simply be a bounce back to earlier consumption levels and growth may now slow once more. But, economists, policy-makers and America’s trade partners will all be watching closely to see whether indeed the US consumer has shrugged off the financial crisis and is set to recover its place as the driver of the world economy. This scenario seems all the more likely if consumers forget the lessons offered by the crisis about the perils of excessive debt and once again turn to borrowing to finance consumption.
* For the technically-minded, the smoothing is performed with a LOWESS local regression. The code used to produce all of the charts is available on github.
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I worry about terms like “soar” and “collapse” – they seem to be the favourite of even the quality press, reporting any up or down blip in economic data these days. House prices soar, interest rates soar, oil prices soar; in my opinion only eagles and AFL footballers really soar.
The “collapse” in consumption mid 2008 was only back to the level of late 2007 so hardly worthy of hyperbole. More a blip. Like just before the life-support machine flatlines…
James: I’d agree that these metaphors are over-done, and “collapse” should, perhaps, be kept for soufflés. Still, I would say that the decline in consumption (an acceptably bland term?) was historically significant. The crisis did, after all, see the biggest annual decline in consumption over the 50 year time-series.
Most impressive, Stubborn.
It’s interesting how the period 70s-80s keep appearing everywhere I look at.
Have a look at
http://www.econ.berkeley.edu/~saez/saez-UStopincomes-2007.pdf
Now, in relation to little ol’ Oz:
http://andrewleigh.com/?p=2533#more-2533
Do you have similar consumption data for Australia?
If this trend continues, should we expect to see US unemployment (which has been stuck officially at around 10% for some time now) begin to reduce reasonably quickly?
Now you are talking about changes in first derivative – not the same thing surely.
Lefty: that’s hard to say: a lot would depend on what the consumption is being spent on. If it’s borrowed money spent on imports, it may not help unemployment too much.
James: since the commentary here is about PCE growth (soaring, collapsing, etc), looking at the level of the first derivative is entirely appropriate, I would have thought.
Stubborn,
Reading your last reply to JamesGlover, I have to agree the last fall in consumption is quite eye-catching.
But you know what really impresses me? The change in behavior from the 702-80s on. Mind you, growth in consumption is still quick. But it has moderated quite a fair bit, don’t you think?
Was the principal driver in the 70s perhaps increases in fuel prices for family cars?
Hmm. Reading the last couple of comments I realise that I have fallen into a trap for young time-series players. Personal consumption expenditure is measured in dollars, so looking at annual growth rates over time is not very sensible because inflation messes up the comparison. As James alludes to, inflation in the 1970s was high thanks to the oil price shocks and high inflation continued into the 80s. This means that some of the growth in personal consumption simply reflects higher prices not just people buying more “stuff”. Fortunately, there is data available for this: the BEA also publishes a PCE chain-type price index (PCEPI) which aims to capture changing prices of consumption goods. While similar to CPI, the basket of goods used is somewhat different, aiming to align more closely with the items used in the PCE index itself. I will redo the growth chart using changes in “real” (i.e. inflation-adjusted) consumption.
I have now posted a “real” consumption growth chart.
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Stubborn,
I found this a couple of weeks ago and I remembered we had already talked about this:
Inequality and Crises.
http://krugman.blogs.nytimes.com/2010/06/28/inequality-and-crises/
Krugman sees a potential link between debt/financial crises, inequality and ideology.
He considers that household debt may be due either to relatively lower income growth or over-consumption. What do you think?
Marco I would say that it’s a bit of both. Interestingly, I’ve been reading The Spirit Level which talks about income inequality and it leads me to the view that income inequality can trigger greater consumption (to keep up with the Jones’), including by those who cannot afford it but if they have access to debt they can still spend. This would suggest that debt-driven financial crisis (and Minsky suggests most are of this type) are more likely in more unequal societies.
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