Saturday, January 22, 2011

Why the Stability in Household Spending?

Between 2006 (the year household spending peaked) and 2009 (the latest available data), average household spending fell 5 percent, after adjusting for inflation--from $51,504 to $49,067. This is a relatively modest decline considering the severity of the Great Recession. Why has household spending been so stable?

1. Some households are spending more. Householders aged 65 or older boosted their spending between 2006 and 2009--up 0.7 percent after adjusting for inflation, according to my analysis of Consumer Expenditure Survey data. Every other age group cut back, with householders under age 45 cutting back the most.

2. Most workers have jobs. The unemployment rate stood at 9.4 percent in December 2010, an unacceptably high level. Nevertheless, 90 percent of workers had a job in December. An NBER survey found that 19 percent of workers had experienced unemployment between November 2008 and October 2009, a painfully high number. Nevertheless, 81 percent of workers had a job during the darkest days of the Great Recession. This fact has stabilized household spending.

3. The unemployed are minding the gap. When household income declines, many families attempt to bridge the (hopefully temporary) gap by draining their savings or borrowing. The same NBER survey found that, among those who became unemployed, average household spending fell by a modest 3.5 percent. One-third of the unemployed had taken money out of savings, and 27 percent had received financial help from friends and family. A Pew Research poll confirms that many of the unemployed are receiving a helping hand. Forty-nine percent of Pew respondents reported loaning money to someone during the recession.

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