Heterogeneity in Economic
Shocks and Household Spending
March 2015
Sebastian Devlin-Foltz
John Sabelhaus
Federal Reserve Board
The analysis and conclusions set forth are those of the author and do not indicate
concurrence by other members of the research staff or the Board of Governors of the
Federal Reserve System.
Is Rising Inequality Affecting
Economic Stability and Growth?
• Inequality is rising, low-modest income families “kept up”
their spending by borrowing excessively during boom years
• House price boom reinforces increased spending and
borrowing through wealth and/or collateral channel
• Housing boom ends, consumers deleverage, spending falls
• Incomes fall, especially for low-modest income (& young?)
• Debt overhang (student loans?) slowing spending, recovery
2
Goals/Approach for this Paper
• Does household survey data support the narrative?
oMost favorable evidence is from geographically-constructed data
oUse micro data to look directly at changes in income, wealth,
spending, and debt accumulation across groups and time
• Need comprehensive micro data that tracks macro trends
o Survey of Consumer Finances (SCF) cross-sections, 1995-2013
• Use synthetic cohort analysis to deconstruct trends
o Birth cohort groups gives “lifecycle” perspective
o “Permanent” income groups within birth cohort groups speaks
directly to inequality and related heterogeneity narratives
3
Survey of Consumer Finances (SCF)
• Federal Reserve Board’s triennial household survey
• Income and balance sheets, some spending information
• Oversamples high wealth families
• SCF has same basic structure since 1989
oPermanent (usual) income measure only available 1995+
• Does the SCF capture the trends in income, wealth,
spending, and debt that we are trying to explain?
4
Aggregate Income
140
National Income and Product Accounts
Index (2006=100)
120
100
80
Sources: National Income and Product Accounts, Statistics of Income, Survey of
Consumer Finances. NIPA Income is the total of line 2.1.1 plus 7.2.21 minus 2.1.7,
2.1.19, 2.1.20 and 7.2.11. SOI Income is total AGI less deficit. SCF Actual Income is a
household's total income in the year prior to the survey year. SCF usual income is a
household reported income in a "usual" year.
60
40
1994
1997
2000
2003
2006
2009
2012
Aggregate Income
140
National Income and Product Accounts
IRS Statistics of Income
Index (2006=100)
120
100
80
Sources: National Income and Product Accounts, Statistics of Income, Survey of
Consumer Finances. NIPA Income is the total of line 2.1.1 plus 7.2.21 minus 2.1.7,
2.1.19, 2.1.20 and 7.2.11. SOI Income is total AGI less deficit. SCF Actual Income is a
household's total income in the year prior to the survey year. SCF usual income is a
household reported income in a "usual" year.
60
40
1994
1997
2000
2003
2006
2009
2012
Aggregate Income
140
Survey of Consumer Finances Actual Income
National Income and Product Accounts
IRS Statistics of Income
Index (2006=100)
120
100
80
Sources: National Income and Product Accounts, Statistics of Income, Survey of
Consumer Finances. NIPA Income is the total of line 2.1.1 plus 7.2.21 minus 2.1.7,
2.1.19, 2.1.20 and 7.2.11. SOI Income is total AGI less deficit. SCF Actual Income is a
household's total income in the year prior to the survey year. SCF usual income is a
household reported income in a "usual" year.
60
40
1994
1997
2000
2003
2006
2009
2012
Aggregate Income
140
Index (2006=100)
120
Survey of Consumer Finances Actual Income
Survey of Consumer Finances Usual Income
National Income and Product Accounts
IRS Statistics of Income
100
80
Sources: National Income and Product Accounts, Statistics of Income, Survey of
Consumer Finances. NIPA Income is the total of line 2.1.1 plus 7.2.21 minus 2.1.7,
2.1.19, 2.1.20 and 7.2.11. SOI Income is total AGI less deficit. SCF Actual Income is a
household's total income in the year prior to the survey year. SCF usual income is a
household reported income in a "usual" year.
60
40
1994
1997
2000
2003
2006
2009
2012
Aggregate Net Worth
140
Financial Accounts of the United States
Index (2007=100)
100
60
Sources: Financial Accounts of the United States, Survey of Consumer Finances. FAOTUS
and SCF net worth measures adjusted for conceptual consistency as in Bricker et al (2015)
20
1995
1998
2001
2004
2007
2010
2013
Aggregate Net Worth
140
Financial Accounts of the United States
Survey of Consumer Finances
Index (2007=100)
100
60
Sources: Financial Accounts of the United States, Survey of Consumer Finances. FAOTUS
and SCF net worth measures adjusted for conceptual consistency as in Bricker et al (2015)
20
1995
1998
2001
2004
2007
2010
2013
Aggregate New Car Spending
120
National Income and Product Accounts
Index (2007=100)
100
80
60
Sources: National Income and Product Accounts, Survey of Consumer Finances. NIPA Table 2.4.5 Line 5 "New
Motor Vehicles". SCF car spending totals new cars purchased with a loan in the survey year or year prior with a
model year newer than the survey year minus 2, and new cars purchased with cash in the survey year or year prior
with a model year older than the year prior to the survey year.
40
1995
1998
2001
2004
2007
2010
2013
Aggregate New Car Spending
120
National Income and Product Accounts
Survey of Consumer Finances
Index (2007=100)
100
80
60
Sources: National Income and Product Accounts, Survey of Consumer Finances. NIPA Table 2.4.5 Line 5 "New
Motor Vehicles". SCF car spending totals new cars purchased with a loan in the survey year or year prior with a
model year newer than the survey year minus 2, and new cars purchased with cash in the survey year or year prior
with a model year older than the year prior to the survey year.
40
1995
1998
2001
2004
2007
2010
2013
Aggregate Recent Housing Purchases
120
National Association of Realtors /
Department of Commerce
Index (2007=100)
100
80
60
Sources: National Association of Realtors, Department of Commerce, Survey of Consumer Finances. National
Associaiton of Realtors data is the sum of existing single family home sales in each quarter between survey year Q3 12 and survey year Q3. Department of Commerce Data is the sum of new homes sales in each quarter between
survey year Q3 - 12 and survey year Q3. SCF measure is total weighted number of households that purchased their
home within the last three years.
40
1995
1998
2001
2004
2007
2010
2013
Aggregate Recent Housing Purchases
120
National Association of Realtors /
Department of Commerce
Survey of Consumer Finances
Index (2007=100)
100
80
60
Sources: National Association of Realtors, Department of Commerce, Survey of Consumer Finances. National
Associaiton of Realtors data is the sum of existing single family home sales in each quarter between survey year Q3 12 and survey year Q3. Department of Commerce Data is the sum of new homes sales in each quarter between
survey year Q3 - 12 and survey year Q3. SCF measure is total weighted number of households that purchased their
home within the last three years.
40
1995
1998
2001
2004
2007
2010
2013
Aggregate Household Debt
120
Financial Accounts of the United States
Index (2007=100)
90
60
Sources: Financial Accounts of the United States, Survey of Consumer Finances. FAOTUS
and SCF debt measures adjusted for conceptual consistency as in Bricker et al (2015)
30
1995
1998
2001
2004
2007
2010
2013
Aggregate Household Debt
120
Financial Accounts of the United States
Survey of Consumer Finances
Index (2007=100)
90
60
Sources: Financial Accounts of the United States, Survey of Consumer Finances. FAOTUS
and SCF debt measures adjusted for conceptual consistency as in Bricker et al (2015)
30
1995
1998
2001
2004
2007
2010
2013
And SCF tracks top 1% income share…
25%
Administrative Data
SCF Bulletin Income, Households
Percent Share
20%
15%
Sources: Survey of Consumer Finances (SCF) and Piketty and Saez (2003 + updates). SCF incomes
are collected for the calendar year prior to each triennial survey. See Appendix B for details on
Administrative, SCF Bulletin, and SCF Market income concepts. Income thresholds for identifying
the top 1% of households and tax units are reported in Appendix C.
10%
1988
1991
1994
1997
2000
2003
2006
2009
2012
Especially after fixing income concept…
25%
Administrative Data
SCF Bulletin Income, Households
SCF Market Income, Households
Percent Share
20%
15%
Sources: Survey of Consumer Finances (SCF) and Piketty and Saez (2003 + updates). SCF incomes
are collected for the calendar year prior to each triennial survey. See Appendix B for details on
Administrative, SCF Bulletin, and SCF Market income concepts. Income thresholds for identifying
the top 1% of households and tax units are reported in Appendix C.
10%
1988
1991
1994
1997
2000
2003
2006
2009
2012
And correcting for unit of observation…
25%
Administrative Data
SCF Bulletin Income, Households
SCF Market Income, Households
SCF Market Income, Tax Units
Percent Share
20%
15%
Sources: Survey of Consumer Finances (SCF) and Piketty and Saez (2003 + updates). SCF incomes
are collected for the calendar year prior to each triennial survey. See Appendix B for details on
Administrative, SCF Bulletin, and SCF Market income concepts. Income thresholds for identifying
the top 1% of households and tax units are reported in Appendix C.
10%
1988
1991
1994
1997
2000
2003
2006
2009
2012
Synthetic Cohort Analysis
• Given micro data that tracks aggregates, what can we say
about shocks and responses across types of families?
o Narrative focuses on old v. young and rich v. poor
• Six ten-year birth cohorts per chart, lifecycle view
• Within birth cohorts, put families into three “usual” income
groups, separate charts for bottom 50, next 45, top 5
• Show graphically, then use synthetic cohort data to answer
direct questions pertaining to narrative, for example
oWho borrowed so much between 2001 and 2007?
oWho stopped buying cars between 2007 and 2010?
Actual and “Usual” Income in the SCF
• Synthetic cohort analysis by income requires a plausible
sorting of families into groups, actual income too volatile
• SCF actual income is sum of respondent-reported earnings
from wages, businesses, investments, pensions, transfers
• After reporting actual, respondents asked to estimate
“usual” income in a “normal” year, if different from actual
• Self-reported version of “permanent” income
• Most report actual=normal, sizeable minority in each year
report deviations, varies predictably with business cycle
Statistical Properties of Self-Reported Transitory Shocks
• Traditionally, model log household income using
observables (xit) and permanent (µit) and transitory (εit)
shock components:
ln(yit) = βxit + µit + εit
with µit= µi,t-1 + ηit evolving over time.
• Assume transitory shocks zero mean, variance σε2, and
permanent shocks orthogonal with zero mean, variance σµ2
• Ackerman/Sabelhaus (2012) show estimated transitory
variances, percent negative and positive, and skewness of
gap between actual and usual all match panel data
Income and Wealth Change Heterogeneity
• Three charts per variable, one for each usual income group
• Each birth cohort represented by up to seven points
corresponding to the seven (midpoint) ages at which that
cohort was observed between 1995 and 2013
• Focus on three aspects of lifecycle trajectories
oGrowth during the boom period (through 2007)
oChange in trajectory for that cohort in the bust (after 2007)
oRelationship of that cohort’s values to predecessor cohort as
observed 10 years earlier in a different SCF
23
$45,000
Average Income, Bottom 50% by Usual Income
1951-1960
$40,000
1961-1970
1941-1950
$35,000
$30,000
1971-1980
1931-1940
$25,000
$20,000
1981-1990
$15,000
$10,000
$5,000
Source: Survey of Consumer Finances, 1995 to 2013
$0
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
$45,000
Average Income, Bottom 50% by Usual Income
1951-1960
$40,000
1961-1970
1941-1950
$35,000
$30,000
1971-1980
1931-1940
$25,000
$20,000
Indicates how far below previous cohort
at the same age ten years earlier
1981-1990
$15,000
$10,000
$5,000
Source: Survey of Consumer Finances, 1995 to 2013
$0
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
Average Income, Next 45 % by Usual Income
$160,000
$140,000
1951-1960
1941-1950
1961-1970
$120,000
1931-1940
$100,000
1971-1980
$80,000
$60,000
1981-1990
$40,000
$20,000
Source: Survey of Consumer Finances, 1995 to 2013
$0
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
Average Income, Top 5% by Usual Income
$1,200,000
1941-1950
$1,000,000
1951-1960
$800,000
1931-1940
1961-1970
$600,000
$400,000
1971-1980
$200,000
Source: Survey of Consumer Finances, 1995 to 2013
1981-1990
$0
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
Average Net Worth, Bottom 50% by Usual Income
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
Source: Survey of Consumer Finances, 1995 to 2013
$0
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
Average Net Worth, Next 45% by Usual Income
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
Source: Survey of Consumer Finances, 1995 to 2013
$0
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
Average Net Worth, Top 5% by Usual Income
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
Source: Survey of Consumer Finances, 1995 to 2013
$0
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
Spending and Borrowing Heterogeneity
• Again, three charts per variable, one for each usual income
group; variables of interest for narrative are
• New car spending (average unconditional $s)
• Buying new primary residence (percent)
• Debt to income ratio (average debt/average income)
• Focus again on shape of lifecycle trajectories, and behavior
relative to previous cohort ten years earlier
• Also consider whether spending or borrowing behavior
consistent with or divorced from income and wealth trends
31
Average New Car Spending, Bottom 50% by Usual Income
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
Source: Survey of Consumer Finances, 1995 to 2013
$0
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
Average New Car Spending, Next 45 % by Usual Income
$10,000
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
Source: Survey of Consumer Finances, 1995 to 2013
$0
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
Average New Car Spending, Top 5% by Usual Income
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
Source: Survey of Consumer Finances, 1995 to 2013
$0
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
Fraction of Families Buying Primary Residence Past 3 Years, Bottom 50%
60%
Source: Survey of Consumer Finances, 1995 to 2013
50%
40%
30%
20%
10%
0%
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
Fraction of Families Buying Primary Residence Past 3 Years, Next 45%
60%
50%
40%
30%
20%
10%
Source: Survey of Consumer Finances, 1995 to 2013
0%
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
Fraction of Families Buying Primary Residence Past 3 Years, Top 5%
60%
50%
40%
30%
20%
10%
Source: Survey of Consumer Finances, 1995 to 2013
0%
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
Debt to Income Ratio, Bottom 50% by Usual Income
250%
200%
150%
100%
50%
Source: Survey of Consumer Finances, 1995 to 2013
0%
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
250%
Debt to Income Ratio, Next 45% by Usual Income
200%
150%
100%
50%
Source: Survey of Consumer Finances, 1995 to 2013
0%
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
Debt to Income Ratio, Top 5% by Usual Income
250%
200%
150%
100%
50%
Source: Survey of Consumer Finances, 1995 to 2013
0%
20
25
30
35
40
45
50
Age
55
60
65
70
75
80
Decomposing Aggregate Trends
• Synthetic cohort estimates ultimately useful for calibrating
dynamic models that seek to explain changes in behavior
• Differences in behavior across groups become moments to
match in calibration, for example
oDid new car and primary residence buying decline because
certain types of families were suddenly constrained?
oOr, was it more widespread, maybe expectations driven?
• In the meantime, use simple examples of how synthetic
cohort data supports or refutes various aspects of narrative
41
Who Borrowed So Much Between 2001 and 2007?
Share of Debt, 2001
Birth Cohort
Usual Income 1981-90 1971-80 1961-70 1951-60 1941-50 1931-40
Bottom 50 0%
2%
6%
8%
4%
2%
Next 45 0%
6%
16%
20%
12%
5%
Top 5 0%
2%
4%
6%
5%
2%
All
21%
60%
19%
42
Who Borrowed So Much Between 2001 and 2007?
Share of Debt, 2001
Birth Cohort
Usual Income 1981-90 1971-80 1961-70 1951-60 1941-50 1931-40
Bottom 50 0%
2%
6%
8%
4%
2%
Next 45 0%
6%
16%
20%
12%
5%
Top 5 0%
2%
4%
6%
5%
2%
All
21%
60%
19%
Share of Debt Growth, 2001-2007
Birth Cohort
Usual Income 1981-90 1971-80 1961-70 1951-60 1941-50 1931-40
0%
Bottom 50
1%
4%
6%
3%
2%
13%
11%
-1%
Next 45
4%
25%
18%
1%
0%
Top 5
1%
3%
5%
6%
All
16%
68%
15%
43
Who Borrowed So Much Between 2001 and 2007?
Share of Debt, 2001
Birth Cohort
Usual Income 1981-90 1971-80 1961-70 1951-60 1941-50 1931-40
Bottom 50 0%
2%
6%
8%
4%
2%
Next 45 0%
6%
16%
20%
12%
5%
Top 5 0%
2%
4%
6%
5%
2%
All
21%
60%
19%
Share of Debt Growth, 2001-2007
Birth Cohort
Usual Income 1981-90 1971-80 1961-70 1951-60 1941-50 1931-40
0%
Bottom 50
1%
4%
6%
3%
2%
13%
11%
-1%
Next 45
4%
25%
18%
1%
0%
Top 5
1%
3%
5%
6%
All
16%
68%
15%
44
Who Stopped Buying Cars Between 2007 and 2010?
Share of New Car Spending, 2007
Birth Cohort
Usual Income 1981-90 1971-80 1961-70 1951-60 1941-50 1931-40
Bottom 50 0%
1%
2%
4%
4%
2%
Next 45 1%
2%
7%
12%
14%
7%
Top 5 0%
2%
6%
15%
14%
9%
All
11%
43%
46%
45
Who Stopped Buying Cars Between 2007 and 2010?
Share of New Car Spending, 2007
Birth Cohort
Usual Income 1981-90 1971-80 1961-70 1951-60 1941-50 1931-40
Bottom 50 0%
1%
2%
4%
4%
2%
Next 45 1%
2%
7%
12%
14%
7%
Top 5 0%
2%
6%
15%
14%
9%
All
11%
43%
46%
Share of New Car Spending Decrease, 2007-2010
Birth Cohort
Usual Income 1981-90 1971-80 1961-70 1951-60 1941-50 1931-40
Bottom 50 0%
1%
3%
10%
6%
1%
Next 45 0%
6%
10%
-9%
19%
21%
Top 5 -1%
1%
-22%
19%
14%
20%
All
21%
47%
32%
46
Conclusions
• Shocks to income and wealth between 2007 and 2010 were
widespread across birth cohorts and income groups
• Decreased spending and changes in the other outcome
variables also very widespread
o Support for heterogeneity in circumstances and behavior driving
aggregate trends weaker than previously thought
o Common behavioral changes suggest factors like expectations
about house prices, income growth probably more important
• In any event, narratives based solely on balance sheets,
income fundamentals, or credit constraints, for only a
subset of families seem incomplete
47
Thanks!
john.sabelhaus@frb.gov
Additional Slides
Median Income with Counterfactual Lifecycle Growth
$90,000
$80,000
1941-1950 Cohort
$70,000
$60,000
1951-1960 Cohort
$50,000
1961-1970 Cohort
$40,000
1931-1940 Cohort
1971-1980 Cohort
$30,000
1981-1990 Cohort
$20,000
$10,000
Note: Counterfactual growth rate estimated using observed
growth for earlier cohorts at same ages, 1995 through 2007.
Source: Survey of Consumer Finances, 1995 to 2013
$0
20
25
30
35
40
45
50
55
60
65
70
75
80
Is SCF Missing Some of the 2013 Wealth Gains?
• Financial Accounts (FA) aggregates show stronger gains in
household sector net worth
o FA (‘10 Q1 to ‘13 Q1) +21% aggregate nominal
o SCF shows about +12% for 2010-2013
• SCF respondents may not have fully built in recovery in
housing and stock prices
o National house price indexes disagree on timing
o Some correction for prior survey over-valuations?
• Also, continued strong growth since survey conducted
2014-04-01
2014-01-01
2013-10-01
$339K
(2013 $)
2013-07-01
2010 SCF
Field
Period
2013-04-01
2013-01-01
2012-10-01
2012-07-01
2012-04-01
2012-01-01
2011-10-01
150
2011-07-01
The small nominal change in SCF average house values between 2010 and
2013 is in line with FHFA, and below the increase reported by Case-Shiller
2011-04-01
225
2011-01-01
250
2010-10-01
FHFA
Case-Shiller
CoreLogic
2010-07-01
2010-04-01
2010-01-01
2009-10-01
2009-07-01
2009-04-01
2009-01-01
2008-10-01
275
2008-07-01
2008-04-01
2008-01-01
2007-10-01
2007-07-01
2007-04-01
2007-01-01
2006-10-01
2006-07-01
2006-04-01
2006-01-01
2005-10-01
2005-07-01
2005-04-01
2005-01-01
2004-10-01
2004-07-01
175
2004-04-01
2004-01-01
Index 1989 Q1 = 100
FHFA, Case-Shiller, and CoreLogic Nominal House Price Indexes and SCF House Values
300
2013 SCF
Field
Period
SCF
Average
House=
$316K
(nominal)
200
SCF
Average
House=
$319K
(nominal)
2013 SCF
Field
Period
SCF
Average
Equity
Holdings=
$213k
(nominal)
$228K
(2013 $)
SCF
Average
Equity
Holdings=
2014-07-01
15000
2010 SCF
Field
Period
2014-04-01
2014-01-01
2013-10-01
2013-07-01
2013-04-01
2013-01-01
2012-10-01
2012-07-01
2012-04-01
2012-01-01
2011-10-01
2011-07-01
2011-04-01
2011-01-01
The Wilshire index increased 36% between 2010 Q1 to 2013
Q1, while SCF aggregate nominal holdings rose 29% between
the 2010 and 2013 surveys.
2010-10-01
10000
2010-07-01
20000
2010-04-01
2010-01-01
2009-10-01
2009-07-01
2009-04-01
2009-01-01
2008-10-01
2008-07-01
2008-04-01
2008-01-01
2007-10-01
2007-07-01
2007-04-01
2007-01-01
2006-10-01
2006-07-01
2006-04-01
2006-01-01
2005-10-01
2005-07-01
2005-04-01
5000
2005-01-01
2004-10-01
2004-07-01
Aggregate Stock Market Valuation
Wilshire 5000 Stock Value Index and SCF Mean Equity Holdings
25000
(nominal)
$270K
0