Heterogeneity in Economic Shocks and Household Spending in the US

Abstract

Large swings in aggregate household sector spending, especially for bigticket items such as cars and housing, have been a dominant feature of the macroeconomic landscape in the past two decades. Income and wealth inequality increased over the same period, leading some to suggest the two phenomena are interconnected. Indeed, there is supporting evidence for the idea that heterogeneity in economic shocks and spending are connected, most notably in studies using local-area geography as the unit of analysis. The Survey of Consumer Finances (SCF) provides a household-level perspective on changes in wealth, income and spending across different types of families. The SCF confirms that inequality is indeed increasing in recent decades, and the data provide support for the proposition that shocks to income and wealth are indeed related to large swings in spending across and within birth cohorts. However, the economic shocks associated with the Great Recession and changes in * Submitted September 2015.The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. 154Fiscal Studies spending and debt to income ratios are widespread, and inconsistent with a narrow focus on the experiences and changes in behaviour of particular (especially low-and modest-income) households. Policy pointsr Shocks to income and wealth, and corresponding changes in spending behaviour, were widespread across the population in the period leading up to, during and after the Great Recession.r The boom and bust in household borrowing and spending was not simply driven by policies expanding access to homeownership and credit for previously under-served groups.r When beliefs about house prices and other economic fundamentals were proven wrong, and widespread behavioural changes ensued, the families who became unable to meet their financial obligations experienced the brunt of the collateral damage.