The Consumer as a “Shadow of its Former Self”

April 14, 2014
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Chicago Fed President Charles Evans noted last week that “the U.S. consumer is slowly improving but is just a shadow of its former self.” We couldn’t have said it better. Retail sales for March is out this morning, and we thought it would be a good time to examine why household spending has been so weak using data that were just updated through 2013.

The chart below plots spending of U.S. households from 2006 to 2013. We split states into five groups, and we plot household spending for the 20% of states that had the worst housing crash from 2006 to 2009 and the 20% of states that had the smallest decline in house prices over the same period. Both groups contain 20% of the population, and the states in the worst housing crash group are Arizona, California, Florida, Michigan, and Nevada. The states where house prices fell the least include about 15 states scattered throughout the country. Both series are indexed to be 100 in 2006, which allows one to calculate the percentage change relative to 2006 for any year by simply taking that year’s spending position on the y axis and subtracting 100.

 

houseofdebt_20140414_1

Two things jump out. First, spending declined during the Great Recession by much more in states where house prices fell the most. This is something we have documented in our own research. But perhaps more importantly, the recovery in spending has been very weak in these areas. In 2013, spending in states where house prices fell the most finally increased above its 2006 level. It has taken 7 years for spending to recover in these states! This is related to an earlier post we did using furniture spending to see the legacy of the housing bust.

The chart above shows clearly that any explanation of the severe recession and weak recovery must have housing as a central feature. Even though house prices have risen more in areas that had the worst crashes, the rise in house prices has had a mitigated effect on spending for reasons we outlined in our very first post.

Now for some technical details. The data used in the chart above are based on state sales tax receipts, made available by the Census. The assumption is that state sales tax receipts are a good measure of spending. We did this quick and dirty — for example, we did not take into account whether states changed their state sales tax rates. Zhou and Carroll have used these data to measure spending, doing a much more careful job adjusting for state sales tax changes.

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7 Responses to The Consumer as a “Shadow of its Former Self”

  1. ReturnFreeRisk on April 14, 2014 at 11:57 ami

    It is NOT the diagnosis; it is Evans’ policy prescription that I have a big problem with. Consumers in housing bubble areas borrowed a lot either to buy houses or to take money out of houses they already owned. Evans wants them to lever up yet again.

    It would be interesting to see the lines on the chart 10 year prior to the bust. Did the housing bubble areas consume more than the others?

  2. tew on April 14, 2014 at 12:11 pmi

    A couple of additional quibbles (in addition to the authors’)

    Many states only tax services, not goods. So if there was a change in mix (proportion of services) during the period it would skew the data further.

    Also, some states have select goods categories not subject to sales tax – for example food for home preparation. On first glance it would seem that per-capital food sales would be quite steady. However, it is food consumption that is quite steady. But during a volatile period we could expect people’s choices between dining out and home to change dramatically. In addition, “luxury” food items sales would decrease during a sharp downturn.

    All of that is missing in this admittedly “quick and dirty” analysis.

    Still, one would expect the impacts to be similar between states, so the value of the comparison (relative) is probably much less compromised than the absolute measure.

    Shifts to and from the underground economy may be more problematic for this analysis. That may be much more pronounced in some states than others. For example, Southern California and Florida are hotbeds for all manner of fraud and underground activity.

  3. MacCruiskeen on April 14, 2014 at 1:54 pmi

    Spending is weak? The savings rate is a measly 4 percent. Consumer-san is spending nearly everything he gets as it is. What more do you want?

    • cas127 on April 15, 2014 at 1:21 pmi

      What more do they want?

      Haven’t you heard that private savings are the devil and therefore to be liquidated (by ZIRP or by crook…).

      How else to increase the herd population’s dependency upon the State and its Servants?

      Of course none of this applies to the massive academic endowments of certain institutions – who have enjoyed endless decades of tax-free compounding.

  4. Dr. No on April 14, 2014 at 1:56 pmi

    Which states were in the group with the smallest decline in house prices?

  5. Peter on April 15, 2014 at 7:09 ami

    So the “winners” in blue increased their spending by about 1.6% per year? Certainly less than any inflation measure you care to choose.

  6. Patricia Shannon on April 15, 2014 at 8:19 pmi

    In the states that where houses were most over-priced to begin with relative to income, we would expect to see larger and more lasting declines in housing prices. Is this connected to people having less buying power?