Long-Term Risks of Robust Consumer Behaviour

Philip Arestis and Elias Karakitsos

Chapter 8 in The Post ‘Great Recession’ US Economy, 2010, pp 179-211 from Palgrave Macmillan

Abstract: Abstract Consumption is by far the biggest component of aggregate demand, amounting to more than two-thirds of real GDP. Hence, developments in consumption affect both the long-term trend of growth in the economy and business cycles. However, consumption is largely a coincident indicator of business cycles. Thus, it falls in the downswing and rises in the upswing in line with the economy. Consumption is affected by both short-and long-run factors. The former reflects mainly the impact of the corporate sector on households through employment and wages and salaries. This impact depends mainly on the severity of the recession. The long-run factors reflect balance sheet adjustment in the assets (equities and houses) and liabilities (mortgage and consumer debt) of the personal sector and induce changes in the savings ratio. It is the purpose of this chapter to analyse the short-run factors in the current downturn and compare them to other business cycles by examining the interaction of the corporate and the personal sector. In the current downturn consumption has fallen by nearly 5 percent, the highest since the early 1950s recession. While short-run factors have played a significant role in the current downturn, the long-run factors have played an equally, if not more, important role. They will certainly be the main hindrance to the recovery of consumption and the overall economy in the next few years.

Keywords: Business Cycle; House Price; Asset Price; Disposable Income; Personal Income (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1057/9780230276109_8

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