Working Papers

Consumers Don’t Cause Recessions

Adam Posen, on why consumers don’t cause recessions:

When forecasting the US economy, what happens to the business sector and investment is far more salient than what happens to consumption. While private consumption makes up 70 percent of the economy, it fluctuates over a far smaller range than investment or net exports (which makes sense, since what households purchase does not vary all that much with the business cycle). A decline in consumption commensurate with the decline in housing prices, and thus households’ perceived wealth, would be on the order of 1.25 percent of GDP, based on how they increased spending as house prices went up. That estimate is essentially what the forecast slowdown in the US economy over the next couple of quarters amounts to—it is not in itself enough to cause a persistent recession. And since at least 1945, the United States has never had a consumer-driven recession, precisely because consumers behave this way.

posted on 21 February 2008 by skirchner in Economics, Financial Markets

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Interesting, so business investment is typically the culprit. What about the impact of falling house prices on investment in new dwellings(although I understand this has been weak for some time)?

Posted by .(JavaScript must be enabled to view this email address)  on  02/21  at  01:51 PM

Yes, the cycle in dwelling construction is part of the overall investment cycle Posen is talking about, although non-dwelling construction provides some offset.

Posted by skirchner  on  02/21  at  02:01 PM

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