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Crisis Alters Pattern of U.S. Consumption

Shopper in Virginia, United States, where household consumption remains subdued (photo: Paul J. Richards/AFP/Newscom)

Global Financial Crisis

Crisis Alters Pattern of U.S. Consumption

IMF Survey online

February 1, 2010

  • U.S. household consumption hit by multiple shocks, declined sharply in 2008
  • Study explores likely direction of U.S. household consumption after the crisis
  • Future of U.S. consumption rate has implications for U.S. recovery and global growth

U.S. households are saving more and spending less of their total income, in reaction to the global crisis, according to a new IMF study.

The rate of U.S. household consumption (as a percent of disposable income) is expected to decline further from its current level, thereby raising the saving rate to about 6 percent of disposable personal income, from nearly 5 percent in 2009.

By using various econometric and simulation approaches that capture well the major shocks during this crisis, IMF economists generated estimates of U.S. consumption over the next several years.

According to their simulations, U.S. household consumption and saving rates are expected to settle at 89–91 and 5–7 percent of disposable income, respectively, over the next several years. Similar levels of consumption and saving rates were last seen in the early 1990s (see chart).

Although not too far from the 2009 savings rate of nearly 5 percent, this forecast implies a decline in U.S. private sector demand of about 3 percentage points of GDP compared with the pre-crisis (2003–07) average, although much of this decline has now already occurred.

If U.S. private sector demand remains at a subdued level, global economic growth will be less vigorous than before and the distribution of current account balances will need to realign—in other words, a smaller deficit in the United States will be matched by smaller surpluses or larger deficits in other countries.

Negative shocks

The decline in U.S. consumption has coincided with a sharp decline in wealth and several closely related economic shocks:

• Household wealth fell sharply, reaching 480 percent of disposable income in 2009. This decline was somewhat larger than the decline in wealth during 2001–02 after the bursting of the internet bubble. In contrast to earlier episodes of wealth decline, housing wealth also declined since peaking in 2007, as U.S. house prices fell for the first time since the mid-1970s.

• Economic and financial uncertainty surged in late 2008, as an extreme fear took over the financial market in such intensity and scope that have rarely been experienced since the Great Depression. The spread between corporate bonds and government securities of 10-year maturity rose to the highest level since the post-war period by a wide margin.

• Long-term growth prospects of the U.S. economy were appreciably revised down with the crisis. According to the IMF’s latest World Economic Outlook, U.S. potential growth was estimated to have been above 3 percent in the late 1990s, but is now estimated to reach about 2 percent over the medium-term, that is after the U.S. economy recovers from the crisis.

• Credit availability tightened relative to pre-crisis years. The debt-to-income ratio of U.S. households stopped growing in 2008, following a rapid rise before the crisis. The pre-crisis credit expansion was driven by mortgages, which accounted for nearly 90 percent of the rise in household debt over the 2000–07 period.

According to the authors, these negative shocks are expected to have lasting effects on U.S. consumption beyond the crisis.


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