Kerwin Charles and Melvin Stephens
“The Level and Composition of
Consumption over the Business Cycle”
Comments by Christopher Jencks
June 9, 2005
Main Findings
• Mean expenditures hardly changed
between 1988 and 2000 for any income
group in the Consumer Expenditure
Survey (CEX).
• Expenditures in top three income quartiles
were not affected by the business cycle.
• In the bottom income quartile, a 2 point
swing in unemployment only changed
expenditures by about 6 percent.
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Problem I: Trends
• Hard to believe that living standards were
no higher in 2000 than in 1988.
• Comparisons between the CEX and the
National Income and Product Accounts
(NIPA) suggest that CEX underestimates
spending in many categories.
• This problem may have gotten worse
between 1988 and 2000, although CEX
and NIPA definitions differ (medical care).
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Quarterly expenditures in 2000 dollars: NIPA versus CEX
$18,000
$15,835
$16,000
NIPA personal consumption expenditure per household
$14,000
$12,478
$12,000
$10,000
$8,300
CEX total expenditure per consumer unit
1988
1990
$8,200
$8,000
$6,000
$4,000
$2,000
$0
1992
1994
1996
1998
2000
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Problem II:
Recessions have changed
• Historically, a recession meant both higher
unemployment and lower consumption.
• But this pattern changed in the 1990s.
• The 1990-91 recession involved an
unusually small drop in consumption.
• The 2001-02 recession involved no drop at
all in consumption (although rise slowed).
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Mean Quarterly Personal Consumption Expenditure per
Household: 1969 to 2004 in chained 2000 dollars
$18,000
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
1969
1974-75
1980-82
1991
2001 2004
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What’s going on?
In the 2001-02 GDP fell in only two quarters
and consumption never fell. Employment
leveled off because:
 More consumer goods were imported,
 Productivity rose
 Domestic investment fell.
Unemployment rose because:
 Net immigration remained high
 New native job seekers exceeded retirees
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Why doesn’t higher unemployment still
lower consumption?
Many trends predict that unemployment
should lower consumption more than in past
• Savings rate is down.
• Unemployment insurance coverage is
down.
• Unsecured borrowing fell from 1990 to
1993 (Is this consistent with industry
data?)
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Why doesn’t higher unemployment still
lower consumption? -- (cont.)
 Asset values matter more than saving
rates for consumption smoothing
 Secured borrowing may have risen in
1991-92 and 2002-2003
 Is the two earner family protective? How?
 Could inter-family transfers have risen?
 Did macroeconomic policy change in
ways that protected more consumers?
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Conclusions about paper
• Need more checks on validity of CEX trend data
for expenditures. Check NIPA.
• Need data on whether CEX incomes fell in early
1990s and rose late 1990s.
• Need to define “treatment.”
• Estimate effect of “treatment” on cash and
noncash income, total expenditure, and types of
expenditure
• Spell out how people protect themselves from
downturns, and see why lowest quartile fares
worst, if it does. Is it just low assets?
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