Consumer spending dominates the composition of the U.S. economy, trending at about 70% of gross domestic product (GDP). But how have consumers fared in the aftermath of the Great Recession and financial crisis that began 10 years ago? Data show that relative to other economic recoveries, consumer spending has rebounded at a much slower rate. And, there does seem to be some truth to the widely circulated idea that consumers have shifted their spending patterns, focusing more on experiences. However, this shift should not be overstated. There has been strong growth in consumer spending in traditional goods as well. Consumers have not taken on additional debt relative to incomes or GDP. Growth in spending may be slower than in other recoveries, but it also may be more durable.
CONSUMER RECOVERY — STEADY BUT SLOW
Because consumer spending represents such a significant percentage of U.S. GDP, it is hard to think that we can have marked improvement in GDP growth without an increase in consumer spending. Business investment is also a major component of GDP, but why do businesses invest? The answer is ultimately to create more goods and services to sell to consumers. Thus, consumer spending patterns tell us a great deal about the health of the economy, but also provide some foresight into our economic future.
To examine how consumers are doing in the aftermath of the Great Recession, we compared the current recovery with those following the three previous recessions [Figure 1]. The x-axis of the chart represents the time since the recovery began and the y-axis represents the cumulative increase in spending, together depicting the increase in consumer spending after each of the past recessions. We can see that consumer spending has only increased by about 20% during this recovery, which is just half of the 40% rebound in spending that occurred following the recessions that ended in 1982 and 1991.
The chart also shares some details related to the increase in consumer spending, however anemic, which provide some optimism for the future. This recovery, while extended, is still younger than two of the previous three post-recession recoveries, though it is approaching the duration of recovery that began in December 1982. Most of the recent weakness relative to the other recoveries occurred in the first five years of the recession, as shown by how flat the current recovery’s line is, relative to the others. However, during the fourth year of the recovery, the pace of the increase in spending started to pick up. Spending patterns now look consistent with the rate of recovery after the recession of the early 1980s, though not nearly as robust as the recovery that began in the early 1990s. But it is hard to argue that consumers are overconfident in their spending. Overconfidence is one of factors in our proprietary LPL Research Over Index that examines potential warning signs of future recessions.
One of the other components of the Over Index is overborrowing. However, we do not see signs of overborrowing, at least not from consumers [Figure 2]. Consumer debt, whether measured as a percentage of GDP or income, may be high relative to longer-term averages, but both measures are below the high levels reached at the beginning of the financial crisis. Debt levels have stopped declining, but have not reaccelerated. This suggests that the economic expansion, however long, may have farther to go…