Patterns of Consumer Spending

April 1962

CONSUMER spending and income advanced further in March to new high levels. CONSUMER SECTOR - SELECTED INDICATORS Meanwhile, the prices consumers pay for 1947-59-'=100 120 goods continued to show little change. DISPOSABLE INCOME Sales at durable goods stores showed sub- stantial improvement, principally because CONSUMER PRICES 100 120 of a rise in automobile sales. Sales of new RETAIL SALES: NON_DURAILE domestic automobiles increased to 6.6 million units, seasonally adjusted annual rate, 100 up sharply from the first 2 months of the year but still not up to last November's high. 140 A strong performance by department and NEW CAR SALES general merchandise stores in March was 120 offset by some declines elsewhere, and sales for the nondurable goods group as a whole 100 were unchanged from February's advanced

level. In early April, sales at automobile SO dealers and at department stores continued 1959 1960 1961 1962 at a brisk pace. NOTE.—Monthly figures, adjusted for seasonal variation ex- cept for prices. Based on data from Department of Commerce, For the first quarter as a whole, consumer Bureau of Labor Statistics, and Want's Automotive Reports. Monthly disposable Income interpolated from Commerce quar- purchases of goods and services were up terly data. Latest figures shown, March 1962; prices estimated 6 per cent from their cyclical low a year by Federal Reserve. earlier. This rise was about the same as in the comparable period of the 1958-59 up- As compared with a year earlier, disposable swing but less than in 1954-55. Most of the income in the first quarter was up somewhat growth in consumer buying over the past more than consumer spending. In contrast, year represents a rise in physical volume, for at the comparable stage of the two preced- average prices of goods and services have ing upturns the reverse had occurred, with increased little. Growth in population last spending up more than income. year was slightly less than the postwar an- A YEAR OF CYCLICAL EXPANSION nual average of 1.7 per cent, and per capita expenditures increased about 4 per cent. Consumer purchases of nondurable goods The rise in spending, particularly for have been rising for more than a year. goods, has been at an uneven rate during Spending on such staple items as food, bev- this recovery, and this has raised questions erages, tobacco products, drugs, and toilet from time to time as to whether consumer articles has increased throughout the period, buying was lagging the growth in income. but spending for clothing and shoes did not 389

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 1962

390 FEDERAL RESERVE BULLETIN • APRIL 1962

begin to rise until after mid-1961. Service in January and February, it turned up a little outlays have maintained their persistent ad- in March. The weakness during the winter vance, but at a less rapid rate as price ad- may have been associated with the decline vances have slowed. in housing activity. The pace of recovery in durable goods Consumer instalment credit began to ex- spending in 1961 was closely related to pand in the fourth quarter of 1961. The rise changing levels of automobile sales. Sales came a little later after the trough in gen- of new domestic automobiles advanced un- eral activity, and the increase was somewhat evenly during the first half of the year; less, than in the comparable periods of the in the third quarter they fell sharply because 1954-55 and 1958-59 upswings. In early of an unusually early model-changeover and 1962 instalment credit increased at about work stoppages. Sales then spurted in the the same rate as in the fourth quarter of fourth quarter to an annual rate of 6.4 mil- 1961. lion units, a rate not exceeded in any quarter since 1955. For the year as a whole, CYCLICAL PERFORMANCE sales totaled 5.5 million units, down 10 per IN PERSPECTIVE cent from 1960. Imports accounted for an The uneven advance in consumer purchases additional 380,000 units. of goods over the past year has raised ques- Sales of new domestic cars turned down tions about the underlying strength of con- again in January and February 1962. But sumer demands. A comparison of recent the March advance brought the first quarter performance with earlier postwar cycles—as rate up to 6.3 million units. measured by peaks and troughs in the gross An upturn in spending on furniture, ap- national product—may shed some light on pliances, television, and other household this issue. equipment began early in 1961 and coin- Changes in income and spending. During the cided with a rising volume of residential con- contraction and recovery phases of the four struction. Late in the year such spending was postwar cycles, consumer incomes have fol- back almost to its 1959 high. After declining lowed strikingly similar patterns. Purchases

CYCLICAL CHANGES IN INCOME AND SPENDING

RECESSIONS Per cent RECOVERIES

DUtABlE GOODS 10

/ SE f— DISPOSABLPOS E INCOME - 10

O4 '41 • O2 'S3 • Q3 •S7 • O2 '60 • 02 '49 - O2 *»4 - Ol '$• • 01 '61 O2 •49 Q2 •54 01 '5S O1 '61 O2 'SO O2 '55 Q1 Ol '62

NOTE. Based on Department of Commerce quarterly figures first quarter 1962 based on Council of Economic Advisers esti- in constant dollars, adjusted for seasonal variation. Figures for mates; deflators estimated by Federal Reserve.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 1962

PATTERNS OF CONSUMER SPENDING 391

of nondurable goods and services have also These purchases increased 7 per cent in the moved similarly, but durable goods have 1948-49 recession, when output was just shown some important differences. These about beginning to cope with backlog de- comparisons, which are shown in the chart, mand, and declined only 4 per cent in 1953- are based on constant dollar data. It should 54. Such purchases declined more than 10 be stressed that small differences in cyclical per cent in both 1957-58 and 1960-61. performance may not be significant. Typically, purchases of nondurable goods The first striking similarity in consumer have declined only slightly during recessions, income patterns is the slightness of the de- and purchases of services have continued to cline during the contraction phase: in 1957- advance although less rapidly than during 58 disposable income declined 1.5 per cent. expansions. In the other three contractions, including In three of the four postwar expansions, 1960-61, it fell only a half of 1 per cent. including the current one, total consumer The small size of these declines has partly purchases increased between 5 and 5.5 per reflected, partly contributed to, the generally cent in the first four quarters after the cycli- moderate nature of contractions in economic cal trough. In 1954-55 purchases increased activity as a whole. In particular, the sta- 7 per cent, primarily because of the extra- bility of incomes has reflected the counter- ordinary expansion in car sales. cyclical influence of unemployment compen- According to these income and spending sation programs and the steady rise in other comparisons, the 1960-62 performance both transfer payments, as well as the sustained in contraction and in the first year of recov- growth in service and State and local gov- ery compares favorably with 1957-59 but is ernment employment. significantly less vigorous than in 1953-55. A second striking similarity is the narrow The same general results appear, but some range of the increases—from 5.0 to 6.5 per additional perspective may be gained, if one cent—in disposable income in the first four compares income and spending, in constant quarters following the lows in aggregate ac- dollars, 1 year after the cyclical low in gross tivity. The rise in such income over the first national product with the levels at the pre- three quarters of the recent expansion was ceding cyclical peaks, as shown in the sharper than in the preceding two recoveries, tabulation below: but it slowed down in the first quarter of 1962, along with aggregate activity. Peak 1 year Disposable Consumer Total consumer purchases, after adjust- after trough income purchases (percentage increase) ment for price changes, have also changed Q4 '48 Q2 '50 5.7 6.8 little from peak to trough of postwar con- Q2 '53 Q2 '55 6.0 7.4 tractions. On the whole, however, consumer Q3 '57 Ql '59 3.3 3.8 Q2 '60 Ql '62 5.2 4.8 spending was better maintained in 1948- 49 (up 1.5 per cent) and in 1953-54 (no Spending rates. Another basis for apprais- change) than in 1957-58 (down 1.5 per ing consumer spending in the current recent) and 1960-61 (down .8 per cent). covery is to relate spending directly to in- The greater strength in the two earlier come. Spending rates for total consumption recessions, as the chart indicates, is attribu- and the three major groups, based on cur- table mainly to purchases of durable goods. rent prices, are shown in the next chart.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 1962

392 FEDERAL RESERVE BULLETIN • APRIL 1962

Total expenditures rose more slowly than the trough—total consumption expenditures income in the first two quarters after the had advanced 6 per cent while disposable in- 1961 trough, and the spending rate conse- come had increased 6.5 per cent. At this quently declined. In contrast, the spending stage of the two preceding recoveries, spend- rate increased during the first two quarters ing had risen more than income. In the year after the 1954 low and in the first quarter and a half preceding the 1961 trough, how- after the 1958 low. In the third quarter of ever, the spending rate was higher than in the 1961-62 recovery the spending rate rose the similar period of the two earlier cycles, slightly, and in the most recent quarter it in- and the rate is higher now than at the com- creased further despite some slowing in the parable phase of the 1958-59 recovery. rise of consumer purchases. Associated with changes in the proportion By the first quarter of 1962—a year after of disposable income spent for total goods and services are varied patterns for the major consumption groupings. Maintenance of the CONSUMER SPENDING total spending rate during recessions stems RELATED TO DISPOSABLE INCOME mainly from the persistent growth in service TOTAL SPENDING expenditures—many of which represent rel- - O 2 '54 95 atively fixed charges on consumers' incomes '61 "•".„„ •• •s —while both outlays and the spending rate • ' ' " o i •58 for goods are curtailed. Recovery is marked 90 by a pick-up in outlays for goods, especially i ! 1 1 ^n durables. While service outlays continue to DURABLE GOODS rise in the upturn, the spending rate tends 15 to level off. The spending rate on goods and services

10 has fluctuated between 92 and 94 per cent

r 1 1 1 /iA in recent years, well below early postwar 50 NONDURABLE GOODS years when consumers were drawing on liquid assets accumulated during World War

45 H and rapidly expanding their use of credit. At current income levels, a change of 1 per ^— cent in the spending rate would be equiva- 40 lent to nearly $4 billion of purchases. 40 SERVICES Liquid assets. Spending at various stages of the cycle may be influenced by the volume 35 of liquid assets—demand deposits, currency, and various types of financial savings—consumers hold in relation to their income. •\/i i i t i i 1 1 30 6 4 2 TROUGH 2 4 t Consumer liquid assets have increased stead- QUARTERS AFTE ily over the past decade, about in line with disposable income. Depending on the phase NOTE.—Based on Department of Commerce quarterly figures, adjusted for seasonal variation. Figures for first quarter 1962 based on Council of Economic Advisers estimates. of the cycle, the amounts held have ranged

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 1962

PATTERNS OF CONSUMER SPENDING 393

from 75 to 80 per cent of the annual rate ADDITIONS TO CONSUMER LIQUID ASSETS of disposable income. RHATED TO DISPOSABLE INCOME Consumers tend to add more to their liquid assets during recessions when spending is reduced, than during expansions when spending is increased. Also, they are more reluctant to go into debt when incomes are declining and more willing to increase debt when incomes are rising. These tendencies toward increased liquidity in a downturn tend to prolong it, but at the same time they help prepare the way for recovery. The recent pattern of increase in consumer liquid assets, in relation to disposable income, has differed in important respects from that in the two preceding cycles, as may be seen in the chart. During the 1960- 61 downturn, additions to consumer liquid 6 4 4 6 assets increased steadily and sharply in con- QUARTERS IEFOIC QUARTERS AFTER

trast to a delayed and somewhat smaller NOTE.—B i Federal ReMnrnre and DepartmenDepartment of Com- -aerec gum—_„ . ma, ad justed forr •easona•ell variationiti . Fi build-up in the two earlier recessions. for fint QQsrter ~^ ftitfffl; incincomo e from Council of nomic Advisers. Moreover, consumers have continued to make large additions to their liquid assets CHANGING CONSUMPTION PATTERNS through the recovery period to date. Particu- Consumers have increased their spending larly noteworthy is the increase in the two on services more sharply than on goods dur- most recent quarters; at this stage of the two ing the postwar period. As a result, the com- previous cycles, consumers were adding suc- position of expenditures has changed im- cessively smaller amounts to liquid assets. portantly. Consumers today are allocating Over the current cycle, the build-up of 10 cents more to services out of each dol- liquid assets has reflected, to a larger extent lar spent, and 10 cents less to goods, than than usual, shifts out of marketable securi- in 1947. ties as consumers have responded to chang- About half of the postwar gain in relative ing yield differentials. One influence in the importance of services, however, reflects first quarter of 1962 was the rise in interest higher prices. Prices of services have risen rates paid on time deposits. Another factor steadily and rapidly—although the pace in the recent growth in liquid assets may slowed after 1953—and by 1961 averaged have been the decreased volume of pur- 53 per cent above 1947. Prices of durable chases of new single-family houses as com- goods are 19 per cent higher than in 1947, pared with earlier recoveries. Also, the and prices of nondurable goods 22 per cent. recent build-up may have reflected the failure Prices of both durable and nondurable goods of consumption expenditures to rise as fast have shown little change over the past few relative to income as in earlier recoveries. years.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 1962

394 FEDERAL RESERVE BULLETIN • APRIL 1962

Less for goods. Food and clothing are of these three groups now accounts for a much less important in the consumer budget significantly larger share of total outlays for today than in 1947. One reason is that fami- services than in 1947. lies with rising incomes tend to spend pro- In 1960, individuals spent $20 billion on portionately less on basic needs. Gas and oil medical care—including such items as doc- expenditures have gained in importance, but tor and hospital bills, and health in- most of the rise occurred in the first half of surance premiums—up 78 per cent from the postwar period and was associated with 1953 and 189 per cent from 1947. Rising the rapid build-up in car numbers. medical costs, medical progress, and a longer life span have been contributing factors. CONSUMER SPENDING Outlays for private education and research 1957-59=100 140 have tripled since 1947. The sharpest ad- vances have come in recent years with the

120 rise in number of youths of college age and SERVICES the heightened interest in education. Spend-

ALL GOODS 100 ing on brokerage and legal fees, interest on consumer debt, and other personal business services has more than tripled. 80 Expenditures for housing have increased

i i i i i i i i 60 substantially, but somewhat less rapidly in 120 recent years than earlier when rents and DURABLE house purchases were increasing sharply. GOODS 100 Spending for household operation—including electricity, gas, water, and telephone 80 services—has increased steadily and is 184 per cent above 1947. 1954 1956 1958 1960 1962 An important question is whether the postwar shift toward increased spending on NOTE.—Based on Department of Commerce quarterly figures, adjusted for seasonal variation. Figures for first quarter 1962 services will continue. The rapid rise early based on Council of Economic Advisers estimates. in the period reflected largely corrections of Spending for durable goods has fluctuated supply and price distortions arising out of rather widely, in large part because of swings the war. The advance in recent years, how- in demands for autos. The share of the con- ever, has been just as large as earlier. Cur- sumer dollar going to durable goods rose to rently, service outlays account for about the 15 cents in the boom automobile year of same proportion of the spending dollar as 1955 but is now back to 12 cents, the same in 1929 and also in the late 1930's. as in 1947. Increased demand for services has re- More for services. Service outlays have sulted in rising employment in the service nearly tripled since 1947. Especially dra- industries even during recession, and this matic have been the increases in expendi- may have had a generally stabilizing effect tures for medical care, personal business, on employment and on the economy as a and private education and research. Each whole. It is not easy, however, to evaluate

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 1962

PATTERNS OF CONSUMER SPENDING 395

the effect the shift has had on investment in and apparently all types of books—fiction fixed capital, because the service group en- and nonfiction, hardcover and paperback compasses a heterogeneous assortment of alike—have shared in the rising trend. activities, ranging from such intensive cap- Spending for sporting events has risen ital-using industries as electric utilities, trans- considerably less than other leisure cate- portation, and communication to the do- gories and less than total consumer expendi- mestic and personal service industries where tures. Purchases of radios and television sets, fixed capital needs are comparatively small. in the meantime, have about kept pace with Leisure activities. Americans are devoting total spending since 1953. greater amounts of time and money to leisure activities than ever before. Sports equip- GROWTH RATES ment, the theater, books, foreign travel, and the like have been taking an ever-larger Notwithstanding shifts in consumer prefer- share of the consumer dollar. ence for various goods and services, total In 1960 people spent more than $2 bil- consumer purchases, measured in constant lion on foreign travel, almost double the dollars, have grown at a remarkably stable amount for a year as recent as 1953. Spend- rate since World War II. Growth since 1947 ing on sporting goods rose 76 per cent over has averaged a little less than 3.5 per cent the same period as people turned to active a year. participation in all types of games and sports Service outlays have grown more than 4 including boating, riding, and flying. Ex- per cent a year with the pace even more penditures on books increased 77 per cent, rapid since 1954 largely because of the stepped-up spending on medical care, personal business, and education. Expenditures SELECTED LEISURE ACTIVITIES on public transportation services have the CHANGES IN EXPENDITURES lowest postwar growth rate among the major service categories. Among nondurable goods, food and clothing have risen about 2 per cent a year, a little faster than population growth. Gas and oil have averaged 6 per cent a year, but growth has been less rapid in recent years. Durable goods purchases have grown about 4 per cent per year over the whole period. Since 1954, however, the rate has been less than 3 per cent. Purchases of autos and parts, which were increasing more than

1953 1960 8 per cent a year in the first hah* of the period, have shown only a slight annual rise NOTE.—Based on Department of Commerce annual figures. in recent years.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis