Pundits want us to believe that the American family has changed their spending habits during the recession. Over the past year and a half, families are spending less of their after-tax income as is evident by the increase in the saving rate. The most recent data available from the Bureau of Economic Analysis show that the personal saving rate has climbed by 3.7 percentage points since the recession began, from 1.5 percent in fourth quarter of 2007 to 5.2 percent in the second quarter of 2009—a relative increase of almost 350 percent (see Table 1).
If we dig deeper into the figures, however, we see that the drop in spending—the increase in the saving rate—appears to be largely a result of lower energy prices and less spending on cars, which are likely caused by fewer people having to drive themselves to work and less access to consumer credit. Importantly, this change in consumption and saving will likely not persist, since families’ incomes have not risen and they do not appear to have changed their other spending very much. Policies that increase Americans’ financial security are therefore necessary to make sure the savings rate doesn’t fall again as the economy recovers.
Since the recession began, families have maintained and occasionally even increased the share of their disposable income spent on items other than energy and cars, such as health care. The implication is that consumption will likely increase and the saving rate will likely decline again if energy prices start to rise again and if the turmoil in the car and labor market starts to settle down and people begin buying more cars again.
What’s more, the saving rate could be affected as the credit market continues to recover and credit becomes more available to more consumers to purchase large ticket items such as cars. A sustained decline in consumption and increase in the saving rate is thus dependent on more than temporary price drops and reduced access to credit. For example, an increase in incomes for low-income and middle-income families will allow them to pay for necessities and save for their future.
Let’s take a closer look at how people have spent their money in the recession. Every quarter, the BEA releases personal consumption data broken down by major types of products, which allows us to get a clearer picture of how consumers’ behavior has changed during the recession. Last week, when the BEA released the data for the second quarter of 2009, the BEA also unveiled a revised structure for presenting personal consumption expenditures. The updated breakdown of consumption expenditures is more in tune with the major consumption categories that households use and allows us to see how families have changed their spending behavior during the current recession.
For example, under the old personal consumption expenditures by product structure, the only category for vehicles was “motor vehicles and parts,” whereas under the revised classification structure, vehicle expenditures are separated into to categories, entitled, “motor vehicles and parts” and “recreational goods and vehicles.” To date, the BEA has only released data from 1995 onward using the revised classification of personal consumption expenditures by product, so while data from 1947 and on was available under the old classification system, we are unable to include a comparison of expenditures prior to 1995 at this time. And, since the available data would only allow us to compare the current recession to the 2000 recession, we instead focus on the changes in expenditures and saving that have occurred since the fourth quarter of 2007.
As Table 1 highlights, overall spending on services as a share of personal disposable income, especially health care, actually increased slightly overall between the fourth quarter of 2007 and the second quarter of 2009. Overall spending on goods as a share of personal disposable income, especially durable goods, declined during the same period. Importantly, however, the majority of consumption categories have remained largely unchanged. In fact, nearly three-quarters of the increase in the personal saving rate that measures the drop in consumption can be explained by the decrease in spending in just two consumption categories: gasoline and other energy goods (35.7 percent) and motor vehicles and parts (29.7 percent).
Specifically, expenditures on energy and vehicles as a share of personal disposable income declined by 1.3 percentage points and 1.1 percentage points, respectively, between the fourth quarter of 2007 and the second quarter of 2009. By comparison, the category with the next largest decline in spending as a share of disposable income—financial services and insurance—decreased by just 0.4 percentage points during the same period and accounts for only 11.5 percent of the increase in the saving rate (see Table 1).
Consumers have not altered the share of their total disposable income that they are spending on most goods and services very drastically. For example, the share of disposable personal income that families spent on clothing and footwear fell by just 0.3 percentage points between the fourth quarter of 2007 and the second quarter of 2009, and this change in spending accounts for only 7.8 percent of the increase in the saving rate.
It is also worth noting that health care spending has grown as a share of personal disposable income. It increased by 0.6 percentage points since the recession began. Put differently, without the increase in health care expenditures, the personal saving rate could have increased an additional 16.8 percent between the fourth quarter of 2007 and the second quarter of 2009 (see Table 1).
Meanwhile, consumers have changed the share of their disposable income that they spend on gas, as gas prices climbed, plummeted, and have begun to climb again in the recession. More specifically, in the fourth quarter of 2007, a gallon of regular unleaded gas cost $2.12 and consumers spent 3.9 percent of their personal disposable income on gas and energy expenditures. The price of gas peaked in the third quarter of 2008, as did the share of consumers’ disposable income spent on gas and energy goods, at $3.91(in 2008 dollars) and 4.3 percent, respectively. In the third quarter of 2008 both the price of gas and the share of personal consumption expenditures spent on gas and energy fell to their lowest levels of the recession, standing at $1.87 and 2.51 percent, respectively.
Most recently, data from the fourth quarter show that gas prices and the share of personal disposable income spent on gas and energy goods are climbing again. And, as Figure 1 highlights, when filling up the tank takes a smaller bite out of families’ wallets, families have been able to save a slightly larger share of their disposable income.
The plight of the U.S. labor market has had an impact on gasoline and car expenditures, too. The economy has shed 6.7 million jobs since the recession began in December 2007, causing the unemployment rate to climb to 9.5 percent in June 2009 before dropping slightly to 9.4 percent in August 2007 and meaning that fewer people need to drive to work every day. The turmoil in the American auto industry has also had an impact on the volume of cars purchased during this period, as has reduced credit availability. The combination of fewer workers commuting and families cutting back on unnecessary trips and purchases as well as reducing their use of debt to finances purchases in order to deal with their strained budgets likely means that not only are fewer gallons of gas needed, but that new car purchases are not as high of a priority or as common for many families.
Lower energy prices and fewer car purchases have given families some breathing room during the recession. Part of this is involuntary, as families have had less access to credit with reduced access to and use of credit. Importantly, however, this saving is not likely to last because families do not appear to have altered their overall spending behaviors very much. Once energy prices, the auto industry, and the labor and credit markets return to normal, consumers will likely spend again a larger share of their disposable income on vehicle and gasoline purchases, since their incomes have remained unchanged. The saving rate could then very well drop again.
For the United States to see strong, sustained growth in the saving rate, it must also see strong, sustained growth in the size and security of its middle class. In particular, families’ incomes need to grow much more robustly than they have in the decade leading up to the recession. Stronger income growth will allow families to pay for basic necessities and to save for their future.
Policymakers could take a number of actions to help middle-class families deal with the economic blows that the recession and financial crisis have dealt them and also to ensure that the middle class is an active benefactor as the nation moves toward recovery and a path of long-term growth. For example, to encourage stronger income growth, Congress could pass the Employee Free Choice Act, thereby giving workers more bargaining power with employers by making it easier to join a union. Additionally, Congress could expand the Earned Income Tax Credit, which would provide a boost to working families’ incomes.
Policymakers could also help families’ incomes go further by addressing inefficiencies in the health care system and the energy market. Enacting legislation that helps the United States deal with volatile energy prices—for example, by promoting investment in and the use of renewable energy sources and increasing energy efficiency standards—could ease the strain that volatile energy prices have come to hammer on families’ and employers budgets. Additionally, implementing comprehensive health care reform could both save families money by making the system more efficient and lessen the daunting and potentially crushing strain that rising health care costs places on families who currently lack coverage.
These actions can’t all be done immediately, but policymakers should start taking steps to make it easier for families to save for a home, their children’s education, and their retirement. The United States will not be able to see a strong and sustained recovery that is necessary to bring back millions of jobs that have been lost without strong income growth and ultimately a middle class with more economic security.
Amanda Logan is a Research Associate with the economic policy team at American Progress and Christian E. Weller is a Senior Fellow at the Center. For more analysis on these issues please see the Economy page of our website.