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We all know that households cut back on spending dramatically during the Great Recession. Are they spending now? Has spending caught up to the trend the United States was on before?
The red line in the chart below plots retail spending in real terms in the United States from 1992 to 2013. We want to get a sense of the trend in spending so we plot spending on a logarithmic scale, and we subtract off the 1992 level to start the line at zero. A logarithmic scale is informative because a straight line in the chart would imply that spending was growing at a constant rate in real terms.
Prior to 2007, spending was growing at a constant rate of about 3% real growth per year. The black dots show the pre-2007 trend and where we would be if we had continued on that trend through 2013. The Great Recession is plainly evident in the chart: see the sharp decline in retail spending in 2008 and 2009 that took us well below trend.
So are we catching back up to our previous trend? Absolutely not. In fact, in 2013, it looks like the gap may be getting even larger. The gray arrow shows that we are not even close to the trend we were on before the Great Recession hit. This is unusual. In most recessions, strong growth takes us back to the trend we were on before the recession hit. Something about the Great Recession is different.
Why aren’t we getting back to trend? One answer often given is that the housing boom artificially boosted spending from 2002 to 2006, and so the trend we were on was an unrealistic benchmark that could not be sustained.
But the data contradict that story. There is no evidence that spending was above trend from 2002 to 2006. In the chart above, the red line doesn’t go above the black dots during the housing boom. Further, there is no evidence that the economy was overheating in terms of capacity from 2002 to 2006. House prices were booming, but other measures of inflation were steady.
Instead, the chart above may be evidence corroborating the worrisome “secular stagnation” view. The housing boom fueled household spending, but that spending only kept us on the same path we were on before – and it was done by enticing debtors to borrow without considering if they were about to make the right borrowing decisions and spend out of ephemeral housing wealth. When the housing boom disappeared, the permanent adjustment downward in the chart above suggests that we were already on a secular decline in household spending that the housing boom masked temporarily.