United States: Discretionary Consumption Expenditures in this Cycle

• We defined a discretionary consumption expenditures concept for the United States. Going all the way back to 1959, we calculated it in chained dollars on a quarterly basis and broke it down into its components.

• After the latest recession, it took real discretionary expenditures nine quarters to return to their pre-recession level. This was the slowest such recovery of the seven past recessions, at least.

• It is not surprising to learn that spending on motor vehicles and parts, which is still far from its pre-recession level, has been one of the reasons for this sluggishness.

• It comes as much more of a surprise instead that discretionary services expenditures, too, have been a factor in this.

• In real terms, the recovery in household discretionary expenditures would likely have been even more laborious had it not been for the spectacular drop in the price of household electronic equipment.

Discretionary consumption expenditures

The necessities of modern living impose on households certain expenditures that are harder to cut back on than others. These include food for home-prepared meals, housing, and healthcare. In real terms, these expenditures should be the least sensitive to the economic cycle. In technical terms, we say that, in the short and medium term, the price and income elasticity of these expenditures is not as high as it is for the others. These other expenditures, over which households can exercise greater discretion, should be more cyclical. They are supposed to vary more in line with household sentiment regarding the economic situation and, where the more costly items are concerned, with interest rate levels. This is why it is of interest to try to define a concept of discretionary expenditures.

In the United States, monthly data allows us to isolate some expenditure categories that are less discretionary than others. Among the goods categories, these include:

• Food and non-alcoholic beverages, purchased for offpremise consumption

• Therapeutic appliances and equipment

• Pharmaceutical and other medical products

• Gasoline and other energy goods

The fact that an expenditure category is considered as non-discretionary does not mean that it cannot contract. Indeed, over the course of the latest recession, spending on food and non-alcoholic beverages diminished in real terms from July to December 2008.

Real household gasoline expenditures, for their part, have declined steadily since 2004, probably because escalating energy prices have encouraged households over time to opt for more fuel-efficient vehicles. However, the fact remains that, as illustrated in Chart 2, the amount of gasoline used does not vary much in the short run even when its relative price swings widely. Moreover, the amount used has not varied much despite the drop in household income that occurred during the recession. For this reason, this goods category is not included among the discretionary expenditures.

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Among the services categories, these include:

• Housing Essentially, this covers rental of non-farm housing, including imputed rental of owner-occupied housing.

• Health

• Financial services furnished without payment

This last category is not included among the discretionary expenditures as these are implicit expenditures. It should be noted that our definition of discretionary services expenditures is the same as the one used by McCarthy.

We thus arrive at a notion of discretionary expenditures that without a doubt constitutes the cyclical portion of consumption expenditures.

We calculated a quarterly aggregate of real discretionary expenditures, broken down into sub-components, going back to 1959. There were seven recessions over this period4. The most recent is the one where the recovery that followed in household discretionary expenditures was the slowest. Indeed, this spending returned to its prerecession level only this past quarter, that is, in 2011Q3. This means that, from the cyclical trough of 2009Q2, the recovery stretched across nine quarters.

If we take a closer look at the major categories of expenditures, we realize that the sluggishness of this recovery was due to discretionary services expenditures. In fact, the recovery in real services expenditures is still far from complete.

Chart 5 shows that, in real terms, expenditures in five of seven major services categories have yet to return to their pre-recession levels. Of these five categories, three in particular have contributed to the fact that real discretionary services expenditures are still far from having fully recovered from the recession.

Of the seven recessions considered, the latest is the one where transportation services expenditures registered the sharpest decline, combined with a lethargic recovery. Everything that has to do with the use of motor vehicles is the principal culprit in this affair, led by maintenance and repair services. In this case, though, a price effect might have amplified the pullback during the recession. Indeed, over this period, the services expenditures deflator tied to the use of motor vehicles grew 5.4% at an annual rate, compared with 1.6% for the total consumption expenditures deflator. The downturn in real expenditures on financial services and insurance persisted long after the recession. Where financial services are concerned, the primary driver behind this trend was spending for the use of financial products and services (e.g., credit cards, ABMs, overdrafts and other banking services). The available data does not allow us to delve any deeper into the matter, although it is probably safe to say that the decline in revolving credit, which ceased only in 2011Q1, was a contributor. As for insurance expenditures, the main factor was net real expenditures on health insurance, particularly contributions to employee insurance.

Discretionary durable goods expenditures

The breakdown of real durable goods expenditures shows that spending on motor vehicles and parts, and even more so that on recreational vehicles (e.g., motorcycles, bicycles, pleasure craft), is still far from having regained the ground lost during the recession.

Expenditures on furnishings and household equipment, however, have just made up that distance. Regarding real spending on recreational goods (other than vehicles), instead, we could say that it was practically unscathed by the latest recession. It need be said, though, that since the beginning of that recession, the deflator for this category has declined by about 35%. This drop in prices has prolonged a trend that has been ongoing for several decades. This is why, though purchases in volume terms in the past quarter were up 38% over their level at the onset of the recession, the amount that consumers spent was only slightly greater than back then.

It is thanks to this spending on recreational goods that the discretionary durable goods expenditures aggregate managed to top its pre-recession level at the end of 2010.

The principal categories of recreational durable goods expenditures that have registered particularly strong growth in real terms are audiovisual equipment, including television sets, personal computers and their peripherals, software and other computer equipment. These are also the categories where we have witnessed the most spectacular drops in prices.

Conclusions

In real terms, discretionary expenditures represent just over half the consumer spending in the United States. They clearly show that the current recovery in consumption expenditures has been particularly slow to unfold. Indeed, in real terms, discretionary expenditures have just made it back to their pre-recession level. Having taken nine quarters to complete, this recovery was the longest of the past seven recessions, at least. The sluggishness of the recovery is attributable to several components. It will come as no surprise to anyone that spending on motor vehicles and parts is one of these. It is still far from its pre-recession level, as is spending on recreational vehicles. However, it is more surprising to find out that such has been the case also for several categories of discretionary services expenditures, including transportation services, financial services and insurance.

It remains to be seen to which extent the decline in real discretionary expenditures in these services categories is due to possible structural changes, as opposed to the particularly brutal loss of household wealth and the persistently high unemployment rate. We have reason to believe that, in real terms, the recovery in household spending would have been even slower had it not been for the spectacular drop in the price of household electronic equipment.