Handbook of US Consumer Economics

Handbook of US Consumer Economics

Editors

Andrew Haughwout

Federal Reserve Bank of New York, New York, NY, United States

Benjamin Mandel

J.P. Morgan Asset Management, New York, NY, United States

Table of Contents

Cover image

Title page

Copyright

Contributors

Preface

Chapter 1. Empirical analysis of the US consumer: fact, fiction, and the future

1. Big(ger) data: new sources and new questions

2. Consumer spending and the aggregate economy

3. Household finance

4. Responding to shocks

5. Spending over the life cycle

6. Measurement issues

7. International perspectives

8. Concluding thoughts

Chapter 2. Handbook of the consumer chapter: trends in household debt and credit

1. Overview

2. Data

3. Decomposing the borrowing cycle

4. Trends in borrower characteristics

5. Trends in other debt

6. Perspectives on current household debt

7. Conclusion

Chapter 3. Trends in household portfolio composition

1. Introduction

2. Survey of consumer finances data and comparison to aggregates

3. Composition of average household portfolios

4. Household portfolios across the asset distribution

5. Asset concentration

6. Cohorts

7. Financial vulnerability, shocks, and the health of the household balance sheet

8. Conclusion

Chapter 4. Household debt and recession in Brazil

1. Introduction

2. Aggregate view

3. Novel data set on Brazilian household debt

4. Characteristics of the household debt boom

5. Potential causes of the household debt boom

6. Concluding remarks

Chapter 5. Rationality in the consumer credit market: choosing between alternative and mainstream credit

1. Introduction

2. Pawn credit as an alternative to regular bank credit

3. Background: how pawnbroking works

4. Data and summary statistics

5. Main results

6. Conclusion

Chapter 6. How do consumers respond to real income shocks?

1. Introduction

2. JPMCI research on consumer spending responses to income and price changes

3. Conclusion

Appendix

Chapter 7. Spending to and through retirement

1. Introduction

2. Description of data sources

3. Literature review

4. The life cycle of spending

4.3. Generational view

6. Implications

7. Suggestions for further research

8. Closing

Chapter 8. Are millennials different?

1. Introduction

2. Definitions of generations and a review of research on age, generations, and economic decisions

3. A comparison of demographics by generation

4. Comparison of income and balance sheets by generation

5. Comparison of consumption behavior by generation

6. Case study I: vehicle purchases

7. Conclusion

Data appendix

Chapter 9. China's consumer spending e-commerce: facts and evidence from JD's festival online sales

1. Introduction

2. Overall development of China's e-commerce

3. Patterns and key features of China's e-commerce

4. E-commerce spending and regional income

5. Concluding remarks

Appendices

Chapter 10. Consumer expectations and the macroeconomy

1. Disentangling preferences and expectations

2. Survey data on subjective expectations

3. Quantitative and probabilistic question formats

4. The information content of probabilistic questions

5. Are expectations data predictive?

6. Integrating subjective expectations data into economic models of behavior

7. Summary and directions for future research

Chapter 11. Macro forecasting using alternative data

1. The importance of macroeconomic measurement and prediction

2. Important economic data releases and prediction

3. Macro Data are Noisy

4. Our goal: real-time macro data with less noise

5. Alternative data

6. An framework for alternative data

7. Predicting data releases with search data

8. Modeling case study: Nonfarm payrolls

9. Live production results

Chapter 12. Regional price parities in the United States

1. Introduction

2. Price levels for CPI areas

3. Regional price parities for states and metropolitan areas

4. Selected results

5. Concluding remarks

Chapter 13. Measuring prices and real household consumption of medical goods: service-based versus disease-based approaches

1. Introduction

2. Basic theoretical framework

3. The current service-based approach to medical measurement

4. The disease-based approach

5. BLS experimental disease-based price indexes

6. Data

7. Results

8. Discussion and future work

9. Conclusion

Chapter 14. A brief history of the supplemental poverty measure

1. Introduction

2. History and background

3. Construction of the SPM thresholds

4. Resources

5. Additions to income: noncash benefits

6. Subtractions from resources: necessary expenses

7. SPM estimation

8. SPM poverty rates

9. Changes to the SPM since 2011

10. Extensions of the SPM

11. Ongoing research on the SPM

12. Future directions for SPM

13. Summary

Index

Copyright

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Contributors

Sumit Agarwal,     National University of Singapore, Singapore

Bettina H. Aten,     Bureau of Economic Analysis, Suitland, MD, United States

Marieke Bos,     Bos is at the Swedish House of Finance at the Stockholm School of Economics, Sweden, and a Visiting Scholar at the Federal Reserve Bank of Philadelphia, PA, United States of America

Ralph Bradley,     Retired, Littleton, NH, United States

Jesse Bricker,     Research and Statistics, Federal Reserve Board, Washington, DC, United States

Sharon Carson,     Retirement Solutions, J.P. Morgan Asset Management, New York, NY, United States

Liana E. Fox,     Research Economist Social, Economic and Housing Statistics Division, U.S. Census Bureau, Washington, United States

Gabriel Garber,     Research Department, Central Bank of Brazil

Thesia I. Garner,     Research Economist, Division of Price and Index Number Research, Bureau of Labor Statistics, U.S Department of Labor, Washington, DC, United States

Andrew Haughwout,     Federal Reserve Bank of New York, New York, NY, United States

Apurv Jain,     Harvard Business School and Microsoft Research, Boston, MA, United States

JPMorgan Chase Institute,     JPMorgan Chase & Co, Washington, DC, United States

Christopher J. Kurz,     Division of Research and Statistics, Federal Reserve Board of Governors, Washington, DC, United States

Donghoon Lee,     Federal Reserve Bank of New York, New York, NY, United States

Geng Li,     Division of Research and Statistics, Federal Reserve Board of Governors, Washington, DC, United States

Benjamin R. Mandel,     Multi-Asset Solutions, JP Morgan Asset Management, New York, NY, United States

Joseph Marlo,     Retirement Solutions, J.P. Morgan Asset Management, New York, NY, United States

Brett Matsumoto,     Division of Price and Index Number Research, Bureau of Labor Statistics, Washington, DC, United States

Atif Mian,     Princeton University, United States

Kevin B. Moore,     Research and Statistics, Federal Reserve Board, Washington, DC, United States

Je Oh,     Retirement Solutions, J.P. Morgan Asset Management, New York, NY, United States

Jacopo Ponticelli,     Northwestern University, United States

Katherine Roy,     Retirement Solutions, J.P. Morgan Asset Management, New York, NY, United States

Joelle Scally,     Federal Reserve Bank of New York, New York, NY, United States

Amir Sufi,     University of Chicago Booth School of Business, United States

Lauren Thomas,     Federal Reserve Bank of New York, New York, NY, United States

Jeffrey Thompson,     New England Public Policy Center, Research Department, Federal Reserve Bank of Boston, Boston, MA, United States

Wei Tian,     School of Economics, Peking University, Beijing, China

Giorgio Topa,     Research and Statistics, Federal Reserve Bank of New York, New York, NY, United States

Wilbert van der Klaauw,     Federal Reserve Bank of New York, New York, NY, United States

Daniel J. Vine,     Division of Research and Statistics, Federal Reserve Board of Governors, Washington, DC, United States

Yang Yang,     BBD & Department of Political Science, University of California San Diego, San Diego, CA, Unites States

Miaojie Yu,     China Center for Economic Research (CCER) and National School of Development, Peking University, Beijing, China

Preface

June 2019 marked a full decade since the conclusion of the 2007 recession, an event which most observers agree originated in the household sector, as sharply declining home prices and rising mortgage defaults led to unprecedented pressures in world financial markets. In spite of their large size and importance in the overall economy, consumer behavior in housing markets, more generally, had not been at the center of research activity. For many years prior to the 2000s, residential real estate finance in particular had been treated by academics as a relatively quiet and uneventful little corner of the financial markets, where defaults were rare and usually tied to factors idiosyncratic to the individual borrower. The housing market collapse and the financial crisis that followed changed all that, of course. As consumption began to fall, suddenly questions about consumer decision-making and behavior were front and center in the national debate, not just among academics and market professionals, but among the public more broadly. In 2007, as the recession began, subprime was named the word of the year by the American Dialectic Society, emphasizing the place that mortgage lending to borrowers with questionable credit histories had come to occupy in the public mind. Subprime followed a series of much less wonky words of the year, including plutoed and truthiness as the prior 2  years. In 2010, google was named word of the decade.

These shifts in the reach and perceived relevance of consumer-related research precipitated two lower-frequency trends already underway: the rising prevalence of consumer topics in the broader field of economic research and the use of empirical techniques to address those topics. One measure of these trends is the incidence of consumer research in the American Economic Association's EconLit, a bibliographic database of economic literature containing roughly 1.5 million articles for the period 1991–2018. As shown in Figure 1, articles on household behavior and family economics (JEL codes D10-19) rose as a share of total articles, going from 2% in aggregate in the early 1990s to 6% in recent years. Looking at more detailed categories reveals that this change was dominated by two subcategories, Consumer Economics: Empirical Analysis and Household Saving, Personal Finance. We discuss this in greater depth, as well as other key innovations in empirical economic research, in Chapter 1 of this volume.

Underpinning these trends, new empirical methodologies, vast increases in computing power, and especially new data sources for empirical studies of consumers have all become increasingly widely available, allowing a greater number of researchers to address a greater number of questions in a serious way. This confluence of factors—improved tools and an increased urgency for better understanding of behavior—is the underlying motivation for the Handbook of US Consumer Economics.

Figure 1  Share of total EconLit articles added in each period for JEL code D1—Household Behavior and Family Economics. 

Source: American Economic Association, author calculations.

Our intention as editors was to bring together a wide range of examples of some of the new trends in consumer economics. To do so, we reached out to an unusually diverse set of authors from different backgrounds in academia, business, and government. We received an enthusiastic response, with papers submitted by authors from institutions ranging from the Census Bureau to Microsoft, located not just in the United States, but from Singapore to Brazil. As part of the process of selecting the chapters for the volume, most of the authors joined a January 2018 conference hosted by the JPMC Institute in Washington, DC. The day-long conference produced a lively discussion of each of the individual chapters, with presenters and commenters from very different backgrounds sharing ideas and feedback. During the day, and as the chapters took form over the subsequent months, several important common themes began to emerge, which are summarized in the introduction to the volume. It also became clear that the authors were mainly interested in a volume that would consist primarily of new research—deep dives into a set of specific subjects—rather than a set of literature reviews. As such, it is critical to note that the Handbook does not pretend to be comprehensive but rather reflects new approaches to a set of questions old and new.

The resulting volume will, we hope, represent a valuable contribution to the reader's understanding of important facts about the American consumer. At a minimum, the variety of authors, subjects, methods, and, perhaps especially, new data sets described in the chapters that follow underscore the breadth of the subject and will serve to provoke further work and a deepening understanding.

Chapter 1

Empirical analysis of the US consumer

fact, fiction, and the future

Andrew Haughwout¹,∗, and Benjamin R. Mandel²     ¹Federal Reserve Bank of New York, New York, NY, United States     ²Multi-Asset Solutions, JP Morgan Asset Management, New York, NY, United States

Abstract

The term streetlight effect is used to describe an observational bias in research, given the tension that often exists between the observational demands of a research question and the measurements at hand to answer it. The fact that direct experiments are relatively uncommon in economics is a reflection of this tension. One might argue further that US consumption, with few detailed data sources compared to economic variables like employment and income, is particularly prone to these issues. Today, the interplay of methodological advances and data availability is driving a broader empirical shift in the economics profession that is very much in operation with reference to the US consumer. As the area circumscribed by good light expands, a more holistic view is emerging of consumer motivations, constraints, and, ultimately, behavior, and the observational biases inherent to this line of research are gradually diminishing. This chapter discusses the evolution of data sources used in the analysis of the US consumer and describes key themes in this area of research.

Keywords

Big data; Microdata; Permanent income hypothesis; US consumption; US household balance sheet

A few night ago a drunken man—there are lots of them everywhere nowadays—was crawling on his hands and knees under the bright light at Broadway and Thirty-fifth street. He told an inquiring policeman he had lost his watch at Twenty-third street and was looking for it. The policeman asked why he didn't go to Twenty-third street to look. The man replied, ‘The light is better here.’

Kingston Daily Freeman, February 21, 1925

The term streetlight effect is used to describe an observational bias in research, given the tension that often exists between the observational demands of a research question and the measurements at hand to answer it. The fact that direct experiments are relatively uncommon in economics is a reflection of this tension. One might argue further that US consumption, with few detailed data sources compared to economic variables like employment and income, is particularly prone to these issues. Today, the interplay of methodological advances and data availability is driving a broader empirical shift in the economics profession that is very much in operation with reference to the US consumer. As the area circumscribed by good light expands, a more holistic view is emerging of consumer motivations, constraints and, ultimately, behavior, and the observational biases inherent to this line of research are gradually diminishing.

The objective of the Handbook of US Consumer Economics (Handbook) is to amass a deep and data-driven perspective on consumers. With consumption accounting for over two-thirds of US GDP, this perspective has first-order relevance for understanding how the overall economy is evolving and its underlying sources of growth. Consumer expenditure, to be sure, is a key manifestation of consumer behavior and an area of focus. But the Handbook's main emphasis across the different chapters is a broad understanding of the underlying drivers of spending: evolving financial health, the nature of (and reaction to) economic shocks, the implications of age and the life cycle, and a broader perspective on household outcomes and their measurement. What emerges is a set of empirical findings about the consumer that is likely to be equally enlightening from the perspective of researcher, policymaker, or practitioner.

The biggest challenge in summarizing the vast universe of literature on this area and its subtopics is organizational. One potential rubric to do so would be to sort the topics by frequency. At the high frequency end of the spectrum, empirical research has documented consumer responses to an array of changes in their economic environment—for the most part, real income shocks (e.g., unemployment, tax rebates, health issues, relative price changes) and wealth effects (e.g., real estate, financial assets). At intermediate frequencies are consumer behaviors over the course of a business cycle, their relationship to other cyclical phenomena, and their contribution to aggregate fluctuations. And at lower frequencies, the consumer life cycle defines a set of intra- and intergenerational patterns. One would also include in this latter group slow-moving secular changes in preferences, financial markets, or policy.

Another useful rubric would be to sort topics according to their distributional implications: heterogeneous responses to economic shocks, consumption inequality, intergenerational differences, and differentiation in price deflators, to name a few. Our approach in the Handbook is to consolidate these rubrics into a set of five themes that capture the key clusters common to both. The themes are (1) consumer spending and the aggregate economy; (2) household finance; (3) responding to shocks; (4) spending over the life cycle; and (5) measurement issues. The objective of this chapter is to elucidate these themes as they pertain to current empirical research and, specifically, how the chapters in the Handbook fit in. In prelude, it will also describe the broader trends in data used for consumer-related research.

Given the ambitious goal of highlighting salient research in consumer economics writ large, it is also worth noting that the selection of topics, and even the definition of consumer economics as a subfield, is nonexhaustive. One might argue, for instance, that behavioral aspects of consumer behavior should constitute its own thematic section of the Handbook. While these insights are currently incorporated at least implicitly in the context of other topics, a more focused treatment would not have been unreasonable in light of the growing empirical literature on bounded rationality and consumers' decision-making under uncertainty. We also deploy a narrower definition of consumer research that might be desirable for someone steeped, for example, in the discipline of family and consumer sciences (also known as home economics). Notwithstanding these definitional issues, hopefully the reader emerges at the other end of this volume with a broader understanding of the US consumer, the key questions being asked, and the empirical tools being used to answer them.

The remainder of this chapter is organized as follows. Section 1 discusses the evolution of data sources used in the analysis of the US consumer, which is followed by an overview of the thematic sections of the Handbook in Sections 2–6, respectively. Section 7 brings in a selection of international perspectives. Section 8 concludes with lessons learned and suggestions for future research.

1. Big(ger) data: new sources and new questions

An important motivation for the Handbook is that the analysis of consumption has become increasingly powerful over the past two  decades, owing to parallel developments in data availability and empirical methods. New surveys and the proliferation of big data have widened the range of source materials, forming a more holistic perspective of household finance and spending.

The evolution of research with respect to the consumer mirrors a broader shift in the economics discipline in the direction of applied research. As illustrated by Hamermesh (2013) for Top-3 economics journal publications, research methodology has shifted from being predominantly theoretical in nature in the 1960s through 1980s to more data-oriented in the 1990s and 2000s.¹ Moreover, there has been a compositional shift in the types of empirical paper from those using publicly available sources—most often government surveys and macroeconomic time series—to data more proprietary in nature. Indeed, according to that study, over 60% of top publications in 1983 had a theoretical emphasis, while the vast majority of the remainder was empirical employing public data. By 2011, theoretical contributions had fallen to less than 30%, with the bulk of the remainder divided between empirical (public data) and empirical (proprietary data). Papers with their own data set now account for roughly a third of Top-3 publications. Einav and Levin (2014) show a similar trend for publications in The American Economic Review, with just under half of empirical papers published in 2014 requesting an exemption from the journal's data availability policy, with those divided roughly equally between private sector and administrative data sources.

One can draw rough comparisons between this overall trend and the evolution of research data sets oriented toward the US consumer. An important nexus of consumer-related economic theory and data in the postwar period has been the concept of consumption smoothing. The deceptively simple idea of transferring consumption intertemporally from high- to low-income periods is the cornerstone implication of expected utility theory. It is based on the ideas of the permanent income hypothesis (PIH), developed by Friedman (1957), of the economics of the life cycle, developed by Modigliani and Brumberg (1954), and their formalization in Hall (1978). The evidence offered by Hall was based on aggregate consumption time series from the US National Income and Product Accounts. In that sense, Hall was not only a seminal theoretical paper but an archetype of applied work on the consumer at that time. In what is a close thematic antecedent to the Handbook, Angus Deaton's Understanding Consumption (1992) devotes a considerable amount of real estate to empirical evidence on the major questions of the time: What is the cross-sectional relationship between saving and growth? How does one reconcile contradictory evidence on the life-cycle hypothesis? Does consumption track income too closely? In addressing these questions, the majority of data sources were of the aggregate sort used by Hall and numerous other authors in the 1970s. These questions also hark back to earlier research in the 1960s associated with the literature on balanced macroeconomic growth (e.g., Tobin, 1967) and the estimation of aggregate consumption functions (see summary in Ackley, 1961).

The next phase in empirical studies on the consumer leveraged government-produced public data sources and is characterized by richer, more representative, samples of the US population. Survey programs at the US Bureau of Labor Statistics (BLS) and Census Bureau are good illustrations of the wave of data that broadened out in the 1980s and afterward. The Consumer Expenditure Survey, for instance, was first administered in 1888 (to only 3000 respondents). It served as a basis for analysis of family living conditions, one of the oldest BLS functions, and also provided rudimentary weights for consumer prices indexes. The survey was administered roughly every 10 years over the next century, and then settled into its modern incarnation in 1980, when it began being administered annually and with sample selection done under contract by census. The research dimension of the survey expanded in the 1990s with the first publication of CES microdata in 1993 and the establishment of a separate CE research branch in 1999. Analogous developments were taking place for population census data, labor market surveys, and others, culminating in the creation of the Integrated Public Use Microdata Series (IPUMS) databases beginning in the early 1990s. The Survey of Consumer Finances, Current Population Survey and its annual sidecar publications, Panel Study on Income Dynamics, and Survey of Income and Program Participation are also of this ilk.

Developments in data availability, which by the late 1980s included both aggregate time series and more widely available survey microdata, corresponded to new types of research questions about the consumer being asked and answered. Blundell (1988) surveys both the micro- and macrodimensions of research on consumer behavior and describes the prominent linkages between theory and data being explored at that time. These included the optimality and impact of tax proposals, the effect of credit constraints, the implications of real interest rate changes and uncertainty on savings behavior, and the selection of appropriate cost of living indexes. It is also noteworthy that the increasing availability of detailed data offered new empirical perspectives on the research questions of the 1960s and 1970s. Attanasio and Weber (1995), for example, use the CES microdata to demonstrate more resilient links between theories of intertemporal optimization and nondurables expenditures than goods or aggregate data alone. Blundell et al. (1993) use repeated cross-sections of microdata to evaluate estimates of consumer demand relative to measures derived from aggregate data. Far from being anachronistic, survey and aggregate data are still in active use today and, in fact, are still being augmented by new sources. For example, the Survey of Consumer Expectations (see Armantier et al. (2017)) is a nationally representative, Internet-based rotating panel of approximately 1300 households in which respondents field forward-looking questions about inflation, labor markets, and household finance. These measures are designed to provide direct gauges of expectations and, hence, to better understand economic decision-making under uncertainty.

This brings us to the most recent epoch in the evolution of empirical studies about the consumer: big data. While no single definition completely circumscribes the data sets being referred to as big, one can think of it in terms of the differences between today's data and the microdata available since the 1990s. In a survey article about the repercussions of big data for economic research, Einav and Levin (2014) describe big data as, … now available faster, [with] greater coverage and scope, and includes new types of observations and measurements that previously were not available. One might also add that due to the methods of collection of these data sets, whether over the course of online provision of goods and services (e.g., retailers, search engines) or as a by-product of the recordkeeping of firms (e.g., banks and credit card companies) or the administrative records of the government (e.g., tax, social security, and public health authorities), these data are increasingly proprietary, or otherwise restricted, in nature. Hence, both the expansion in the scope of data available and its proprietary nature are consistent with the rise in empirical studies and composition of data sets described in Hamermesh (2013) for economic research as a whole.

Einav and Levin (2014) describe two transition paths in economic literature owing to big data: (1) from representative surveys to universal administrative data and (2) the nascent utilization of private sector data. The former involves large, generally government-administered, data such as those of the Internal Revenue Service, Social Security Administration, and Centers for Medicare and Medicaid Services. The latter includes predominantly private data collected by retailers, financial institutions, and technology companies. One of the key advantages of universal coverage in administrative data sets is the ability to analyze changes in populations and their distributions over time, for example, as Piketty (2014) and an array of coauthors do for the wealth and income distributions employing tax data (e.g., Atkinson et al., 2011; Piketty and Saez, 2014). While oftentimes less comprehensive, new types of timely information in private sector big data can be powerful complements to traditional sources of information about the economy. The richness of Google search data can be informative about unemployment trends (D'Amuri and Marcucci (2012)) or other indicators that are often not available in real-time from statistical agencies (Choi and Varian, 2012). In another prominent example, the Billion Prices Project described in Cavallo and Rigobon (2016) uses a large volume of online retail price data to construct alternative estimates of consumer price indexes. Varian (2014) provides a primer on methodology.

Some contemporary data sets lie in between universal administrative data and private sector sources. For instance, the Federal Reserve Bank of New York's Consumer Credit Panel is a quarterly panel data set based on a nationally representative sample of individual credit reports (see Lee and van der Klaauw, 2010). The data set provides a time series view of households that is holistic across various types of consumer debt and also allows for aggregation to national-level statistics. The existence of both survey and administrative data is suggestive of the benefits that combining them could provide. In an excellent example of this synthesis, Meyer et al. (2015) use comparisons of survey and administrative data for nine government transfer programs to measure the extent of downward bias in the survey reporting of transfer income, concluding that it has been growing over time.

Cognizant of the changes in both the tools of analysis and research questions about the US consumer, our objective in the Handbook is to represent a broad spectrum of current empirical sources. Several of the chapters build on a foundation of detailed survey microdata: Survey of Consumer Finances (Chapter 3); Consumer Expenditure Survey and Panel Study of Income Dynamics (Chapter 8, Chapter 14, Survey of Consumer Expectations (Chapter 10); Consumer Price Index and Public Use Microdata Sample (Chapter 12); Medical Expenditure Panel Survey (Chapter 13). Others use extracts from more universal administrative data: Consumer Credit Panel (Chapter 2); Banco Central do Brasil credit registry (Chapter 4); credit bureau and pawnbroker association data from Sweden (Chapter 5). Others, still, use private sector big data sources: Chase Bank account and card spending (Chapter 6, Chapter 7); JingDong transaction-level e-commerce (Chapter 9); Bing search (Chapter 11). What is remarkable is that, notwithstanding the increasing diversity of sources, all are still highly relevant in the contemporary analysis of the consumer. In many cases, multiple data sets are combined to focus on the research question at hand. And increasingly rich sources of information are also generally used in tandem, or with reference to, the national-level government statistics used in macroeconomic analysis up to a century ago. In other words, the different perspectives offered by developments in data availability, quality, and breadth appear to be better complements than substitutes.

2. Consumer spending and the aggregate economy

Another way to parse the trends in empirical analysis of the consumer is to separate them into broad themes. We begin our thematic exploration of the US consumers through the lens of their macroeconomic importance. The US consumption in the postwar period is a defining feature of its economic history, with reference to both its historical pace of growth and US relative growth. As illustrated in Fig. 1.1, the trend pace of US real consumption growth, at just over 2% since the 1950s, was a step up relative to the prewar period. It has also been relatively stable compared to steeper declines among other developed economies in recent decades. A key driver of strong and stable consumption growth over that period was that overall demand was becoming more consumption intensive. Personal consumption expenditures account for just over two-thirds of the US nominal GDP today, a share that has been roughly flat since 2000 but which rose steadily in prior decades starting out at 60% in the 1960s and early 1970s. The rising US consumption share, in turn, is the result of several coincident factors, including the evolution of household balance sheets, life-cycle spending patterns of the baby boom generation, and also the more general features of the macro environment (such as deepening globalization and trend declines in macroeconomic volatility).

Several Handbook chapters speak directly to the interplay between consumption and macroeconomic growth. Jain (Chapter 11) provides a practitioners' guide to using big data for macroeconomic forecasting, with the idea of not only predicting the outcomes of important macroeconomic statistics but also improving on their accuracy. Chapter 10 describes the advantages of pitfalls of constructing direct measures of consumer expectations, which are, in turn, key determinants of real and nominal aggregate outcomes. In a survey article titled simply Consumption, Attanasio (1999) examines the dynamic decision framework that has become the workhorse vehicle for the understanding of consumer behavior, highlighting the importance of consistency among the economic phenomena tied into the consumer's optimization problem as well as the use of microlevel empirical work as a foundation for understanding aggregate outcomes. In providing distinctly microperspectives on broader macrodata and consumer expectations, these chapters are indicative of the progress made along both of these dimensions over the past two  decades.

Figure 1.1  US real consumption growth in historical perspective. 

Source: Author calculations based on Jordà, O., Schularick, M., Taylor, A.M., 2017. Macrofinancial history and the new business cycle facts. In: Eichenbaum, M., Parker, J.A. (Eds.), NBER Macroeconomics Annual 2016, vol. 31. University of Chicago Press, Chicago.

3. Household finance

A key driver of robust and steady postwar consumption growth has been the evolution of the US household balance sheets and, specifically, the rapid rise in household net worth. A stylized example of this trend and its associated wealth effects is the baby boom generation, which experienced a massive expansion—indeed, a tripling—in household net worth between 1989 and 2016 (Fig. 1.2). This expansion was driven by the combination of relatively high wage growth, robust saving rates, asset price appreciation, and augmented by a secular increase in leverage. It manifested primarily in the rapid accumulation of real assets, such as primary and secondary residences, which account for the bulk of the median household's assets. Real estate, in turn, tends to have higher pass-through into consumer expenditures. Case et al. (2005, 2013) estimate the elasticity of (real) consumption to housing wealth to be about 7%, more than twice the elasticity of financial assets, which weighed in at 3% in comparable specifications. These estimates are ordinally consistent with the coefficients in the Federal Reserve's FRBUS macroeconomic model of the US economy. Financial assets also contributed to household balance sheet expansion and consumption growth, albeit from a lower starting level, registering a 3.7-fold rise on baby boomer balance sheets over that period.

Figure 1.2  The net worth of the median baby boomer household. 

Source: Survey of Consumer Finances, author calculations.

Exceptional growth was not confined to the asset side of the US household balance sheets, as household liabilities burgeoned alongside them in recent decades. By way of comparison, the 151% rise in the median baby boomer household's assets since 1989 corresponded to a 69% rise in household debt. As a result, the rise of household net worth over that period belies an expansion in the overall financial footprint of households. Of course, household liabilities are not a monolith, and changes in consumer credit in recent decades have not been monotonic. In Chapter 2, Haughwout et al. use the Consumer Credit Panel to detail the evolution of household liabilities since the early 2000s, developments around the time of the Global Financial Crisis, and some of the changes since then. In Chapter 5, Agarwal and Bos examine household choices between mainstream and alternative sources of credit.

Relating back to our earlier discussion of new data sources, the increasing availability of detailed information on household liabilities has generally outpaced that of household assets. Housing and financial wealth measures are usually inferred from very aggregate and/or low-frequency statistics. For example, measures of housing wealth are available in great geographic detail in the Census of Population and Housing, but only every 10 years. The Federal Reserve's Survey of Consumer Finances provides a breakdown of broad segments of the household balance sheet every 3  years, but only at the national level and with limited information on the distribution across the population. Aggregate measures of financial wealth are provided in the Federal Reserve Flow of Funds data and, again, in the Survey of Consumer Finances, with more granular albeit narrower data available elsewhere for specific asset holdings like mutual funds. Perhaps one of the most detailed and representative treatments of the asset side of household balance sheets to date is provided by Bricker et al. in Chapter 3 using microdata from the Survey of Consumer Finances.

Finally, the distribution of household balance sheets across the US population is related to the extensive empirical literature on inequality. Attanasio and Pistaferri (2016) summarize recent research on the evolution of the US consumption inequality, its inherent measurement challenges, and the relationship with income inequality over time. Notwithstanding some consumption items that have been converging over time between low- and high-consumption households (notably, durables and leisure consumption), they find that extant measures of consumption inequality track those of income reasonably well. Using alternative measures of consumption, Aguiar and Bils (2015) come to a similar conclusion. Both of these papers stand in contrast to earlier results by Krueger and Perri (2006), who used Consumer Expenditure Survey data to argue that consumption inequality actually rose much slower than that of income. Given the important role played by household balance sheets in consumption outcomes, the exploration of consumption inequality through the lens of the changing distribution of household assets and liabilities is a promising area for future research.

4. Responding to shocks

In addition to explaining the lower frequency trends in the US consumption over recent decades, the household balance sheet is also integral to the observation that macroeconomic volatility has trended downward over time, beginning in the 1980s. The standard deviation of real personal consumption expenditure growth today is roughly a third of what it was in the 1960s and 1970s, even as the variance of real income has been relatively stationary (Fig. 1.3). Implicit in these observations is that economic shocks are increasingly affecting different aspects of household economic decisions. Namely, the shocks underlying aggregate consumption volatility appear to have gradually migrated away from spending and toward household saving rates and balance sheets.

Falling consumption volatility, in turn, is one component of the Great Moderation period beginning in the mid-1980s, though not an entirely uncontroversial one. In some sense, household consumption was along for the ride as output and inflation volatility fell around that time. According to the taxonomy of plausible causes for the Great Moderation outlined in Ahmed et al. (2004) and Bernanke (2004)—structural change, macroeconomic policies, and good luck—only certain elements of structural change pertained directly to changes in household behavior; those elements were primarily related to financial innovations that, among other things, eased liquidity constraints for households. Other drivers focus on the more efficient management of inventories, trends in deregulation, the broad economy's shift away from manufacturing into services, rising globalization, and innovations in monetary policy. So while consumption, as a function of lower income volatility and declining economic uncertainty, benefited from the decline in aggregate volatility, it was not the predominant driver of the broader trend.

Figure 1.3  Volatility of household income and real consumption. 

Source: Bureau of Economic Analysis, author calculations.

There is also some discord as to the extent to which the US consumption even took part in the Great Moderation at all. Gorbachev (2011) finds that after accounting for predictable variation in personal consumption arising from variation in real interest rates, preferences and income shocks, consumption volatility actually rose between the 1970s and early 2000s. A key finding in that paper was that high household-level consumption volatility could coexist with lower aggregate volatility given a decline in the covariance of consumption growth across households. In a similar finding, using a representative longitudinal survey of the US households, Dynan et al. (2012) find that income became more volatile between 1971 and 2008, with the widening of the percent change distribution across households concentrated in its tails. Davis and Kahn (2008) cite microlevel volatility statistics to argue that there was no decline in consumption volatility and individual earnings uncertainty during the Great Moderation period or, at a minimum, that households experienced a much smaller decline in volatility than that experienced by firms.

The contrasting results between micro- and macroperspectives suggest that the empirical vantage point from which volatility observations are taken matters quite a lot. The current state of the art in this respect is the evaluation of individual household responses to specific identified shocks. An indicative example is the raft of papers written about household spending in response to fiscal stimulus measures (e.g., Parker et al., 2013; Mian and Sufi, 2012; Sahm et al., 2012). In this same spirit, Greig and Hamoudi (Chapter 6) use bank administrative data to measure household spending responses to an array of real income shocks: tax refunds, job loss, changes in gasoline prices, among others.

5. Spending over the life cycle

As mentioned above in the context of evolving empirical studies of the consumer, by now there is a long tradition of explaining discrepancies between empirical reality and simple versions of the PIH and life-cycle theories. Carroll and Summers (1989) document that the theories are inconsistent with the grossest features of cross-country and cross-section data on consumption and income, in a way that favors a narrower definition of consumption smoothing—over periods of several years rather than decades. They focus on the close empirical links between consumption and income, a violation of the PIH implication that optimal (smoothed) consumption should follow a random walk. Indeed, a very crude look at spending levels across age groups today, as reported in the BLS Consumer Expenditure Survey (CES), shows the hump-shaped profile over the life cycle (Fig. 1.4). The fact that the consumption profile follows the hump shape of income across age groups quite closely suggests that consumers are either unwilling or unable to spread consumption effectively over time. More striking is that this nexus between consumption and income occurs even for predictable changes in income such as those arising from life-cycle employment patterns.

Several fixes have been proposed in order to bridge the gap between theory and data. Campbell and Mankiw (1989) propose an extension of the simple model, from a single, fully rational, and forward-looking representative consumer to include a second type of consumer who makes decisions according to rules of thumb. This modification helps to explain two empirical violations of the theory: (1) once again, that expected changes in income are associated with expected changes in consumption and (2) real interest rates are not closely related to expected changes in consumption, which means that forward-looking consumers do not adjust their consumption in response to changing interest rates. Attanasio and Browning (1995) demonstrate that by allowing demographics to affect preferences and by relaxing the assumption of certainty equivalence, idiosyncratic age effects and precautionary savings can generate hump-shaped consumption profiles without having to appeal to more mechanical explanations like rules of thumb, myopia, or liquidity constraints. This line of reasoning is consistent with the evolution of the consumption-age profile in Fig. 1.4 insofar as the small degree of flattening in the curves that has occurred in recent years. Whatever the degree of recent financial innovations and the corresponding easing in liquidity constraints, the general contour of spending cannot be explained fully by those developments alone.

Figure 1.4  Consumer expenditures by age group. 

Source: Consumer Expenditure Survey, author calculations.

Building on these results, subsequent contributions to the literature attempt to parse the age-specific consumption behavior of households more finely. Part of this effort involved more sophisticated ways of isolating age cohort effects in the data. For instance, Gourinchas and Parker (2002) deploy a synthetic cohort technique on the CES to infer average age profiles of consumption and income over the working lives of households in different education and occupation groups. They find that these profiles line up reasonably well with the predictions of a flexible structural model of optimal life-cycle consumption. Flexible, in the sense that consumption behavior can change over the life cycle, from buffer-stock agents in youth to something more closely resembling a certainty-equivalent consumer in middle-age. Fernández-Villaverde and Krueger (2007) account for roughly half of hump-shaped consumption paths over the life cycle with changes in household size, but with particularly large failures of consumption smoothing for consumer durables. Browning and Crossley (2001) examine the class of models associated with the life-cycle framework, arguing