Recovering from recessions: household consumption over the business
cycle
Thomas Crossley1
Hamish Low2
1 University
2 University
3 University
Cormac O’Dea3
of Essex and IFS
of Cambridge and IFS
College London and IFS
23rd October 2015
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
1 / 22
Introduction
Patterns and Puzzles in Household behaviour
1
Savings behaviour in recessions
2
How does behaviour differ across groups? Split by age, by housing tenure
F
3
Impact of leverage
Durable vs Non-durable Spending Patterns
F
F
Different speeds of recovery
Long-run changes in volatility
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
2 / 22
Savings Behaviour
Income over the past three recessions
Real disposable income, per capita
90
100
Index
110
120
Using GDP deflator
-10
0
10
20
Quarters since recession started
2008
1980
Crossley, Low and O’Dea
Recovering from Recessions
30
1990
23rd October 2015
3 / 22
Savings Behaviour
Expenditure over the past three recessions
Real total expenditure, per capita
90
100
Index
110
120
Using GDP deflator
-10
0
10
20
Quarters since recession started
2008
1980
Crossley, Low and O’Dea
Recovering from Recessions
30
1990
23rd October 2015
4 / 22
Savings Behaviour
Household Saving Ratio over the past three recessions
-.1
-.05
Difference
.05
0
.1
Household saving ratio, difference
-10
0
10
20
Quarters since recession started
2008
1980
Crossley, Low and O’Dea
Recovering from Recessions
30
1990
23rd October 2015
5 / 22
Savings Behaviour: Summary
Spike in savings around start of recession.
Similar in UK and US
Negative correlation between savings and growth in GDP
Puzzling because consumption should be smoothed through shocks
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
6 / 22
Savings Behaviour: Summary
Spike in savings around start of recession.
Similar in UK and US
Negative correlation between savings and growth in GDP
Puzzling because consumption should be smoothed through shocks
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
6 / 22
Savings Behaviour: Summary
Spike in savings around start of recession.
Similar in UK and US
Negative correlation between savings and growth in GDP
Puzzling because consumption should be smoothed through shocks
Explanations (Alan, Crossley and Low, 2014)
1
Shocks of recessions are permanent to the individual:
∆PDI reflects transitory income, GDP growth permanent
2
Recessions generate uncertainty in permanent income
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
6 / 22
Differences across Groups post-2008: Age
Income
Income, 2008 recession
95
100
Index
105
110
115
120
Per capita by age
2006q1
2009q1
2012q1
2015q1
Quarter
<=35
36-65
>=65
Largest income fall for middle-aged, Old recover fastest
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
7 / 22
Differences across Groups post-2008: Age
Expenditure
Expenditure, 2008 recession
80
90
Index
100
110
120
Per capita by age
2006q1
2009q1
2012q1
2015q1
Quarter
<=35
36-65
>=65
Middle-aged and young both cut expenditure
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
8 / 22
Differences across Groups post-2008: Age
Saving Ratio
Saving Ratio, 2008 recession
-.05
0
Difference
.05
.1
.15
By age
2006q1
2009q1
2012q1
2015q1
Quarter
<=35
36-65
>=65
Saving of all age groups rises - not just about credit constraints
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
9 / 22
Differences across Groups post-2008: Age
Summary
Income fall particularly for middle aged; fast recovery for the old
Savings increased for all groups; especially for the young
Explanations
1
Suggests supply of credit is not the driver of savings spike
2
Role of uncertainty
3
Wealth effects
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
10 / 22
Differences across Groups post-2008: Housing Tenure
Expenditure
Expenditure, 2008 recession
85
90
Index
95
100
105
110
Per capita, by housing tenure
2006q1
2009q1
2012q1
2015q1
Quarter
Renter
Mortgagor
Owner Out.
Sharp fall in expenditure for mortgage holders
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
11 / 22
Differences across Groups post-2008: Housing Tenure
Saving Ratio
Saving Ratio, 2008 recession
-.05
0
Difference
.05
.1
.15
By housing tenure
2006q1
2009q1
2012q1
2015q1
Quarter
Renter
Crossley, Low and O’Dea
Mortgagor
Recovering from Recessions
Owner Out.
23rd October 2015
12 / 22
Differences across Groups post-2008: Housing Tenure
Summary / Puzzle
Expenditure falls most for mortgagors
Sharp spike up in savings
How large is the wealth shock?
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
13 / 22
Differences across Groups post-2008: Housing Tenure
Wealth Shocks
What is the change in net wealth, W , following a house price fall?
ωt
∆W
=
πt
Wt
(1 − Lt )
L : Leverage (debt to gross wealth)
ω : Exposure (share of housing in gross wealth)
π : Return on housing (percentage change in house price)
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
14 / 22
Differences across Groups post-2008: Housing Tenure
Wealth Shocks
What is the change in net wealth, W , following a house price fall?
ωt
∆W
=
πt
Wt
(1 − Lt )
L : Leverage (debt to gross wealth)
ω : Exposure (share of housing in gross wealth)
π : Return on housing (percentage change in house price)
Change in net wealth depends on Exposure and Leverage.
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
14 / 22
Differences across Groups post-2008: Housing Tenure
Wealth Shocks
What is the change in net wealth, W , following a house price fall?
ωt
∆W
=
πt
Wt
(1 − Lt )
L : Leverage (debt to gross wealth)
ω : Exposure (share of housing in gross wealth)
π : Return on housing (percentage change in house price)
Change in net wealth depends on Exposure and Leverage.
Mortgagors: high exposure and high leverage
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
14 / 22
Differences across Groups post-2008: Housing Tenure
Wealth Shocks
What is the change in net wealth, W , following a house price fall?
ωt
∆W
=
πt
Wt
(1 − Lt )
L : Leverage (debt to gross wealth)
ω : Exposure (share of housing in gross wealth)
π : Return on housing (percentage change in house price)
Change in net wealth depends on Exposure and Leverage.
Mortgagors: high exposure and high leverage
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
14 / 22
Differences across Groups post-2008: Housing Tenure
Wealth Shocks
What is the change in net wealth, W , following a house price fall?
∆W
ωt
=
πt
Wt
(1 − Lt )
Age 25: on financial wealth, leverage 0.9, exposure 100%.
⇒ Multiplier on house price change: 10
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
15 / 22
Differences across Groups post-2008: Housing Tenure
Wealth Shocks
What is the change in net wealth, W , following a house price fall?
∆W
ωt
=
πt
Wt
(1 − Lt )
Age 25: on financial wealth, leverage 0.9, exposure 100%.
⇒ Multiplier on house price change: 10
Age 25: on all human and financial wealth - leverage becomes 0.1, exposure 0.11
⇒ Multiplier on house price change: 0.13
Importance of uncertainty about permanent income
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
15 / 22
Durables vs Non-Durables
Non-durables have not recovered
90
95
Index
100
105
110
115
Nondurable consumption, per capita
-10
0
10
20
Quarters since recession started
2008
1980
30
1990
Updated from Crossley, Low and O’Dea (2013). Fall after 2008 is particularly in food expenditure.
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
16 / 22
Durables vs Non-Durables
Durables have recovered quickly
80
100
Index
120
140
Durable spending, per capita
-10
0
10
20
Quarters since recession started
2008
1980
30
1990
Updated from Crossley, Low and O’Dea (2013)
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
17 / 22
Durables vs Non-Durables
How fast do durables recover compared to non-durables?
Show ratio of quantity of durables to quantity of nondurables in 1980 and 2008
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
18 / 22
Durables vs Non-Durables
How fast do durables recover compared to non-durables?
Show ratio of quantity of durables to quantity of nondurables in 1980 and 2008
80
90
Index
100
110
120
Ratio Durable-nondurable volume
-10
0
10
20
Quarters since recession started
2008
Crossley, Low and O’Dea
30
1980
Recovering from Recessions
23rd October 2015
18 / 22
Durables vs Non-Durables
Volume Ratios: 1980 and 2008
Difference is mainly in the spike end 2008/2009: VAT cut and Scrappage, Crossley, Low and Sleeman, 2015
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
19 / 22
Durables vs Non-Durables
Cross-Section Variability
2
2.5
Ratio
3
3.5
Ratio of Durable to Nondurable CV
1980
1990
2000
Year
2010
2020
Decline in cross-section variability and time-series volatility
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
20 / 22
Durables vs Non-Durables: Explanations
1
Decline in volatility of prices
2
Decline in covariance of prices with business cycle
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
21 / 22
Durables vs Non-Durables: Explanations
1
Decline in volatility of prices
2
Decline in covariance of prices with business cycle
3
Decline in durablity / increase in depreciation
4
Durables less luxurious
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
21 / 22
Conclusions
Three patterns to understand:
1
Savings spikes
F
Savings spike up in recessions (US and UK)
F
Common for all age groups
F
Role of uncertainty
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
22 / 22
Conclusions
Three patterns to understand:
1
2
Savings spikes
F
Savings spike up in recessions (US and UK)
F
Common for all age groups
F
Role of uncertainty
Mortgage holders cut expenditure the most - leverage and exposure
F
Need to account for all wealth in thinking about leverage?
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
22 / 22
Conclusions
Three patterns to understand:
1
2
Savings spikes
F
Savings spike up in recessions (US and UK)
F
Common for all age groups
F
Role of uncertainty
Mortgage holders cut expenditure the most - leverage and exposure
F
3
Need to account for all wealth in thinking about leverage?
Durables
F
Ratio of durable to non-durable spending similar to other recessions
F
Both growing slower than previous recessions
F
Nature of durables has changed: spending less volatile
Crossley, Low and O’Dea
Recovering from Recessions
23rd October 2015
22 / 22