Consumer Spending and the Multiverse of Normalcy
Has the macroeconomy really changed?
Consumer Sovereignty is the key for understanding our macroeconomy. Or, at least that is my thinking. Not everyone thinks so, however. I read this quick article recently, which cites some prognosticators from BlackRock suggesting that we are now in a world where the supply-side drives the business cycle, not the demand-side. We are in a new “regime,” or new world, the article states.
Hmm . . . does that mean we have entered some new multiverse version of our macroeconomy? This idea is not that unusual when it comes to macroeconomics. Technology, demographics, policy, regulations and just about everything evolves. As a result, the macroeconomy changes, too.1 I touched on these themes recently here and here.
To say the business cycle is now “supply-side driven” is a provocative idea, and an understandable one given our recent collective experience. Historically, the demand-side, or “aggregate demand,” is cited as the dominant force behind the business cycle. In fact, the very idea of government “stimulus” policy is predicated on that very idea! Yet, while the article does not say so explicitly, BlackRock’s suggestion implies that aggregate demand—of which consumer spending is the key driver—has taken a back seat. This article, too, makes me wonder if consumer spending has somehow changed.
Let’s take a look.
The Whackyverse
I broke down consumption spending way back in the early days of 2022, but it’s worth revisiting the data to see how the multiverse may be unfolding. As a refresh, here’s a picture of what has transpired with consumer spending since 2020:
The figure shows the simple month-to-month percent change for real personal consumption expenditures. The year 2020, in particular, was a wild ride for the largest component of our GDP. Consumption has “calmed down” since, especially after March of 2021. By “calmed down” I mean that the volatility of consumption from month to month has declined. If we measure that volatility by the standard deviation (like we did in discussing the Great Moderation), we can see that vividly. Table 1 shows the standard deviation for each year along with the average growth rates.
The month-to-month volatility of consumption spending has declined dramatically. I will comment on how dramatic a decline from 5.28 is in a second. But first, this begs the question, was any of this normal for consumer spending?
If you’ve read some of my previous posts, you already know my answer to this. No! This was not normal! But, if you look at the trends in the figure above and in Table 1, things appear to be getting back to normal.
The Normalverse
What is normal for consumer spending? Let’s take a look at the period from 2002 through 2019, as shown here:
The average growth rate over this period was only + 0.18 and things were a lot calmer. Contrast the vertical axis on the figure for the 2002 to 2019 era to the axis on the figure for the 2020 and after period. From 2002 to 2019, the month-to-month change never exceeded plus or minus 1 percent. Since January of 2020, month-to-month consumer spending growth has exceeded plus or minus 1 percent nine times.
Now, let’s compare the volatility for the “normal” era to what’s happened since.
As displayed in Table 2, the volatility for consumption over the 2002 to 2019 period is 0.31. Let’s call that the “normal” number for consumption volatility. So far in 2022, consumption volatility is twice that number. In 2021, volatility was about five times the normal; and, in 2020 volatility was about 17 times the normal! Granted, these numbers are generated with different sample sizes, but still. 17 times!
If we put all the years together we can see how truly bizarre things have been with consumer spending before and after January 2020, as seen here:
Now, does the bizarre mean we are in a new world in which consumer spending and aggregate demand take a back seat to the supply side in explaining the business cycle? I do not know for sure, of course. None of my “pointing at graphs” analysis in this post proves or disproves that idea.
However, my macroeconomic gut tells me no. We are not in new regime. At least, consumer spending is not in a new regime, and there shouldn’t be any fundamental reason—or so my macroeconomic gut tells me—that consumer spending and aggregate demand will not continue to play the primary role in driving the business cycle.
A prediction
It appears to me that consumer spending is trending back to “normal,” as represented by the 2002 to 2019 period. What we see in 2020 (and early 2021) is not a “structural shift” or the onset of a regime change. Instead, that experience is a classic example of what macroeconomists call a “shock.” A macroeconomic shock is just that, an out-of-nowhere blindside hit to our macroeconomic life. The key thing with a shock, however, is that after a while things return to normal. A regime change means there is a new normal (much like the apparent fundamental change in the economy that marks the Great Moderation).
With consumption, I do not see a new normal. Instead, I see a getting-back-to normal. For example, if we focus solely on the last twelve months of data—from June 2021 through May 2022—the average month-to-month growth rate of consumer spending is +0.17 percent, pretty much right on the 2002-2019 average. The volatility over those 12 months is still higher than normal at 0.68; however, as the 2020-2021 period recedes into our past, I suspect the ups and downs of consumer spending will track back to normal (towards 0.31 or close to it).
That is a prediction, of course, which will be easily “fact-checked” as the coming months unfold. With respect to those future months, in my next post I’ll provide even more fodder for future fact-checkers with my very-own forecast of consumption.
I realize I am stretching or perhaps misapplying the concept of the multiverse here. But, I needed a catchy title for this post.