A Structural Down-Shift in Spending?

July 18th, 2011 at 5:28 pm

The always-worth-reading David Leonhardt posited that consumer spending was undergoing a large, negative, structural shift.  I said, hmmm, not so sure—you don’t see it in consumption as a share of GDP, though you do see sharply diminished housing investment.

David Leonhardt responds to my response by saying that as far as he’s concerned, spending by consumers is consumer spending, whether it’s on a house or a tank of gas.  So he combines the two graphs from my original post into one.  If you do that, you definitely get a sharp decline in this hybrid consumption+investment measure as a share of GDP. 

Source: NYT

I agree that buying a house is a big expenditure and my original point was that if you’re looking for structural change—a lasting change in shares of the economy—that’s where you’ll find it: residential investment has been and will be depressed for awhile.

So David L and I agree.  But I lose my GDP account nerd privileges if I combine consumption and investment that way.  And there is some substance to this distinction.  To economists, stuff you buy that lasts a long time, like a house, is an investment.  Stuff that doesn’t, like a slice of pizza, isn’t (umm…pizzzza).

The fact that consumers—i.e., people—buy both doesn’t change that distinction.

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3 comments in reply to "A Structural Down-Shift in Spending?"

  1. kharris says:

    Fact is that, in normal times, housing investment is very sensitive to interest rates (cars, too) while other forms of spending as less sensitive. Housing is also highly cyclical (except this time, which is a big part of the problem), more so than most other forms of consumer spending. So while consumer spending IS consumer spending, understanding what’s going on in the economy requires taking a different view of housing than of other forms of consumer spending.

  2. emptywheel says:

    I’d like to see a way to visualize house value/GDP and consumer spending/GDP tracked w/wages.

    Leonhardt’s original article frustrated me bc it talked only about spending, not about the way that falling real wages, added to the withdrawal of the credit that those who were using it to sustain consumption rates, resulted in this drop in spending. But to get to the real problem w/GDP (if consumer spending is going to remain 70% of GDP) then you need to account for all the money the working and middle class no longer have (much of which, during the bubble, was illusory).

  3. A new economy says:

    guys this structural shift goes even deeper….I just bought a house without either party using a realtor financed by private money with 5% down. I have bad credit but have restarted a buisness…the lenders came out worked with me spoke with people i know. the same thing with my business we provide credit where the banks have stopped…..Point A…..A lot of things are happening outside of the traditional methods and don’t show up in the numbers…..B Private business is replacing the services banks use to offer….I don’t know how the banks are going to get back in the mix after they have been replaced since they wont play ball.