Consumer Category Curiosities
Cooling inflation and the Sated Beast
Is the Hungry Beast sated? I can’t help but think so, given the recent CPI report, which the stock market went gonzo over. What does the CPI report have to do with inflation? As I wrote recently, consumer spending is the key to understanding what has been behind the historic inflation numbers. Or, at least, that is what I think. Though maybe I am a bit too obsessed with consumption data, and that obsession has given me tunnel vision? Before I do some soul-searching in that respect, let’s take one more look at recent consumption data.
More normal?
Here is what has been going in with consumer spending and its components the past twenty years, up through this September:
The first column of numbers, showing the average from 2002 to 2019, is the “normal” I went on about in this post (in that post the percentages are month-to-month; in the table here they are annualized). The second and third columns emphasize our recent history, with consumption numbers that are eye-popping. The latter half of 2020 was clearly a rebound from consumers not be able to spend as they normally would have during the lockdown months of 2020. But even after that immediate rebound, spending in 2021 was also remarkable. In 2021, total consumer spending was two and half times the “normal.”
The fourth column of the table reveals our 2022 experience. Consumer spending has cooled in 2022, averaging 2.7 percent over the first nine months of this year. This 2.7 percent average is much closer to the 2002 to 2019 average than what happened between May 2020 and December 2021.
Yet, intriguingly, while total consumer spending has converged closer to “normal,” there is still something unusual going on with consumer spending, specifically with respect to the categories that make up total consumer spending—services, nondurables, and durables.1
Category coolings and contractions
The monthly averages for each consumption category—as shown in the table above— are interesting in their own right. First, spending on durables is equal to the longer-run average for this category, which is better than I would have expected given the general mood of 2022.
Spending on services, too, has cooled relative to 2021. Yet, the average for this category in 2022 is still twice (or close to it) the historical average. This category is still pretty darn hot compared to our pre-2020 experience.
In contrast to the still-hot services category, we have nondurables. For this category, something historically unusual has occurred—spending on durables has contracted in 2022.
Why is the latter fact historically unusual? And, what does this information tell us about what may occur in 2023? To answer those questions, let’s start with the curious case of nondurables. (For the sake of the length of this current post, I will focus on the other two categories later.)
First, it is not necessarily surprising to see a negative number for nondurables—at least not month-to-month. From January through September of this year, this category has had a negative month-to-month growth rate four out of five months. Since May of 2020, this category has had a negative month-to-month growth rate 14 of 29 months. On a month-to-month basis, this category has been up and down.
What is unusual, however, is that over longer frequencies, spending on nondurables is typically positive. That is, the month-to-month ups-and-downs smooth out, putting nondurables in the black. For example, take a look at consumer spending at the quarterly frequency back to 2000 (reported by the bea.gov in addition to the monthly estimates) :
Spending on nondurables has declined for three straight quarters in 2022 (for an average decline of 2.8 percent), the first time that has happened since 2011, and only the second time since 2000 (the other stretch of quarterly contractions occurring during the Great Recession). Why have we had this decline? Expenditure on nondurables may be particularly sensitive to the recent high rates of inflation, which may explain part of the decline. In addition, consumers may be feeling particularly pessimistic in general (for which there is plenty of evidence) so they are cutting back on “discretionary” components of the nondurables category.
An omen?
Figuring out exactly why consumers have cut back on nondurables in 2022 is beyond the scope of this particular post. But, we can ask what this three-quarter decline in nondurables may portend for our macroeconomy. There a couple of ways to put this data into perspective.
This could mean we are heading for a negative real GDP growth in 2023. If this is a sign of consumer pessimism, this category may continue to contract. On the other hand, real GDP did not contract following the three-quarter skid in nondurables in 2011. The average quarterly GDP growth in 2012 was about 1.5 percent. Not great, but not a recession either.
Or, given that a three-consecutive-quarter decline in nondurables is unusual, perhaps we will see a “reversion to the mean” for nondurables in 2023. This category has a long run average (back to 2000) of 2.2 percent. If the rate of inflation stabilizes, and consumer sentiment along with it, this category is likely to converge back to its long-run average at some point in 2023.
Since a three-quarter decline is unusual, if I was a gambler, I would bet on a reversion to the mean—meaning spending on this category will rebound in 2023. What happens in the fourth quarter of this year, of course, will reveal a lot about those chances.
One last thing to note is that even if spending on nondurables continues to slide, one ray of hope with respect to consumer spending (and real GDP) is that the nondurables category is only a quarter of consumer spending. Check out this figure:
The nondurables share (of total consumer spending) is about 23 percent, and has been for 20 years; the average for 2022 thus far is 24 percent. Total consumer spending makes up about 68 percent of total real GDP (as discussed here). Nondurables, in other words, is not the dominant portion of the most important part of GDP.
That distinction belongs to consumer spending on services. Spending on services averaged 66 percent from 2002 through September 2022, and stands at 62 percent so far in 2022. Also, as we saw in the table earlier, spending on services is still “running hot.” As such, this category may be the one to watch as 2023 approaches. I will dive into this intriguing possibility in a future post.
From: https://www.bea.gov/resources/methodologies/nipa-handbook/pdf/chapter-02.pdf, and https://www.bea.gov/resources/methodologies/nipa-handbook/pdf/chapter-05.pdf.