The financial meltdown and subsequent recession caused a nearly 30-year streak of consecutive growth in aggregate consumption to snap. Since 1980, the combination of job growth, lower savings and easier access to credit allowed American consumers to spend a greater amount than they had the previous year, even during times of economic hardship such as the bursting of the dot-com bubble. However, the rapid deterioration of housing and financial markets led to a simultaneous tightening of credit and soaring unemployment, crippling incomes and preventing consumers from maintaining their spending habits. As a result, aggregate consumption slid by 0.3% in 2008 and fell further in 2009, by 1.6% to $9.85 trillion.
Not all spending categories were impacted in the same way amidst the contraction. Expenditures on goods, particularly durable ones, declined more rapidly than spending on services or non-durable goods. The hardest hit categories were motor vehicles and parts, gasoline and transportation services. This is not surprising given that a significant portion of travel is to or from work, with widespread job losses diminishing demand for these categories. Additionally, durable goods by definition are usable over longer periods of time, and thus upgrading or replacing older products such as furniture can be put on hold during times of economic hardship. Meanwhile, expenditures on services generally held their ground or recorded meek growth. However, there were declines even among service providers, with food and accommodation categories slipping in both 2008 and 2009.
Consumer spending grew in 2010 and 2011, regaining the ground it lost in 2008 and 2009. The growth was partially driven by pent-up demand for durables, which were scaled back during the downturn, being unleashed, leading to particularly robust growth within this category. Low interest rates and expanded access to credit allowed consumers to increase spending on large-scale goods in the previous five years. The growth in spending, which has been fueled by declining unemployment and rising disposable incomes have propelled spending habits. Even as commodity price declines dragged down on energy and fuel prices, key consumption components, spending remained robust. Consumer spending has expanded as a portion of total GDP during the five years to 2017 and has been the primary growth factor in the economy. Tightening labor markets and rising home prices supported strong consumption growth in 2016. However, consumption growth is expected to slow during 2017, relative to the strong 2016 result. First quarter results were particularly low and, while growth has tended to accelerate after a low first quarter in recent years (accounting for seasonal adjustments), the deceleration was very pronounced. Lower energy prices and generally diminished price appreciation in both goods and services acted to restrict spending growth, Moreover, wage growth has lagged behind employment gains as of late. However, labor markets have tightened significantly in the first half of 2017, which is expected to place upward pressure on wages as unemployment figures remain below the natural rate. As result, the overall spending growth in 2017 is only expected to be slightly diminished form 2016.
Barring the recent recession, aggregate consumption growth has fluctuated within a narrow band, displaying slow and steady growth over the last two decades. With wage growth anticipated to grow, spending is forecast to continue a steady growth pattern. However, the rate of growth is expected to recede as employment settles near the natural rate. This should limit the rate of job creation and reduce the number of new consumers looking to spend. While this should act to place upward pressure on wages, the effects of wage growth are likely to be muted by monetary policy over the long-term. The recent strong growth from consumer expenditures has supported inflationary pressures, which are expected to stimulate further Federal Reserve actions to increase interest rates. This will raise the effective cost of borrowing for individuals and will tend to drive down the amount of purchasing on credit. Finally, President Trump and the Republican held Congress plan to raise consumer spending through a number of policy initiatives targeting taxes. However, the benefits are not likely to increase spending growth rates over the long-term.
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