The U.S. economy to 2016: slower growth as boomers begin to retire

Monthly Labor Review, Nov, 2007 by Betty W. Su

Mirroring the expansion in consumption, the personal savings rate continued to drop, from 8.2 percent in 1986, to 4.0 percent in 1996, and down to 2.3 percent by 2000. The decline was due in part to rising consumer spending as a proportion of disposable income, but it also was due to perceived wealth effects of a soaring stock market and rising housing prices, a phenomenon that is not adequately captured by the savings rate statistic. (12) It is important to emphasize that the two-decade downturn of the personal savings rate that began in the 1980s is a systematic response of households to changes in the fundamental determinants of the rate, most notably the sizable gains in wealth from financial and real-estate assets.

Throughout the recession and recovery in the early 2000s, households contributed more to GDP growth than in the past. In 2004 and 2005, personal consumption, spurred by rising household wealth and solid job markets, exhibited extremely strong growth. In 2006, despite soaring gasoline prices, a slump in the housing market, and worries over subprime mortgages, consumer spending was steady. (13) Overall, consumer spending grew at an average rate of 3.7 percent between 1996 and 2006, far exceeding the pace of GDP growth over the same period. (See table 2.) By contrast, the personal savings rate dipped to 0.5 percent in 2005, followed by a further decline to 0.4 percent in 2006, the lowest rate since the Great Depression.

Over the long run, consumer spending is determined primarily by the growth of real permanent income, demographic influences, and changes in relative prices. Personal consumption as a share of nominal GDP is projected to be 70.1 percent in 2016. (See table 3.) Real consumer demand is projected to grow at an average annual rate of 2.9 percent from 2006 to 2016. (See table 2.) The importance of the relationship between GDP and personal consumption expenditures also can be viewed from the perspective of the contribution of real personal consumption to the change in real GDP; such change provides a measure of the composition of growth in GDP. (14) Over the 2006-16 projection period, consumption spending will contribute about 2.1 percentage points to the 2.8-percent annual growth rate in real GDP projected by BLS. Real disposable income is projected to grow at a 3.0-percent annual rate between 2006 and 2016 (see table 4), whereas the savings rate is projected to improve gradually, reaching 1.5 percent by 2016.

A closer look at the major expenditure categories reveals that consumer spending on long-lasting items is highly cyclical. During the 1990s, the U.S. economy experienced sustained spending on big-ticket items such as automobiles, home furniture, and major household appliances. In 2000, sales of light vehicles, including autos and light trucks, climbed sharply to a peak of 17.3 million units, as the value of sales incentives reached a new high and buyers responded eagerly to those incentives. In particular, since the 1999 introduction of gas-electric hybrid cars into U.S. markets, consumers have been becoming more and more intrigued by fuel-efficient vehicles.