The Durability of Durable Goods Consumption

Executive Summary

Personal consumption expenditures (PCE) account for roughly 70 percent of overall GDP. While the consumption of durable goods represents the smallest share of overall PCE (i.e., the consumption of goods and services), compared to nondurable goods or services, it is the most volatile component.
Consequently, understanding the current and expected state of this component of consumption can aid in interpreting the state and longevity of the current economic expansion. In this report, we provide an update on our previously published (2013) analysis, which discussed the potential upside or pent-up demand for the consumption of durable goods. Our conclusions at the time found that there was pent-up demand for several sectors of durable goods consumption.

In this report, we discuss whether that demand has come to fruition, as well as expand upon our analysis of durable goods consumption by comparing current spending habits to consumption patterns that existed during prior expansions. While some components of durable goods consumption were quick to recover from the Great Recession, others still demonstrate remnants of the most recent downturn. Spending behavior is mixed across the different components of durable goods; however, underlying trends suggest increased demand for durable goods consumption in the quarters ahead.

Improving Durable Goods Consumption

Consumer spending on durable goods has come back relatively strong, surpassing trend growth over the past couple of years (Figure 1). However, while some components of durable goods consumption have further improved after the end of the Great Recession, others have been slower to recover. Two sectors of durable goods consumption, one large, motor vehicles and parts, and one relatively small, other goods, have remained below their long-run trend, despite improving during the past several quarters. The implications of this weak performance in the motor vehicle and parts sector of durable goods are important for the future growth of not only real PCE, but real GDP growth in coming years.

As we argued in our 2013 report, consumption of durable goods is highly volatile as it includes the purchase of big-ticket items that last for longer than three years (like automobiles, RVs, computers, TV sets, etc.). Today, this sector represents about 15 percent of PCE, compared to about 12 percent when we conducted our previous analysis in 2013. Together with non-durable goods consumption, goods represent about 36 percent of PCE, while services consumption represents about 64 percent. Although smaller than its counterparts, strong growth in the durable goods sector tends to drive PCE growth higher, as growth in the consumption of non-durable goods and of services tends to be relatively stable over time. Consequently, it is important to understand what is driving durable goods consumption.

Source: U.S. Department of Commerce and Windergate Capital

Growth in durable goods consumption has remained relatively strong, growing 6.6 percent per annum in real terms since 2010. However, the consumption of non-durable goods has grown at an average of 2.1 percent, while services has grown at an average of 1.9 percent per annum. In Figure 2, we plotted the behavior of durable goods consumption per business cycle, or consumption from the previous peak to capture the effects of the recession, to the peak experienced in that cycle. As the gold line represents the current expansion, it is clear that the Great Recession was deep and had a lasting impact on this sector. However, the consumption of durable goods has strongly recovered and even seems to have been on the upswing relatively recently. Although the rate of growth is still not as robust as that experienced during the second part of the 1990s, it is strong when compared to what was achieved in previous business cycles.

The durable goods sector within PCE is composed of motor vehicles and parts (4 percent of PCE, 3 percent of GDP), furnishings and durable household equipment (3 percent of PCE, 2 percent of GDP), recreational goods and vehicles (5 percent of PCE, 4 percent of GDP), and other durable goods (2 percent of PCE, 1 percent of GDP). Out of these sectors of durable goods consumption, two are growing ahead of trend today: one being recreational goods and vehicles, and the other furnishings and durable household equipment.

Surging Ahead: Recreational Goods and Housing Equipment

Recreational goods and vehicles consumption has been growing above trend since about 1998 (Figure 3). Our expectation is for this sector to continue to grow above trend in the near future, as it includes some of the most dynamic and technologically advanced segments of consumption in the economy. This sector’s growth has been so strong that it grew from representing about 3 percent of PCE (27 percent of durable goods) before the Great Recession to representing about 5 percent of PCE today (37 percent of durable goods). This improvement as a percentage of PCE has been driven, mostly, by the growth in the consumption of the information processing and media part of the sector. Similarly, as this sector houses the consumption of recreational vehicles, such as pleasure boats, we may expect this sector of consumption to grow as Baby Boomers continue to retire.

Despite actual consumption of recreational goods being roughly 18 percent above its long-run trend, this sector’s performance has not been as strong as in previous expansions (Figure 4). The sector has, however, weathered recessions better than other sectors, which has helped stabilize durable goods consumption growth after a downturn.

Source: U.S. Department of Commerce and Windergate Capital

The other sector currently outperforming its long-run trend is furnishings and durable household equipment consumption (Figure 5). This sector is comprised of furniture and furnishings, household appliances, glassware, tableware, household utensils, and tools and equipment for the house and garden. As expected, this sector grows in tandem with the U.S. housing market, and as the U.S. housing market has continued to strengthen, most things related to housing have continued to expand.

As depicted in Figure 6, when compared to previous cycles, this sector of durable goods consumption was slow to regain its strength after the Great Recession. Although suffering alongside the housing market during the past recession, this sector’s growth has outpaced its long-run trend since early 2014. We expect this sector of durable goods consumption to continue to strengthen over the next several years, as we are not expecting the housing market to slow any time soon. Even as we expect a gradual rise in interest rates, which poses a slight risk to interest rate-sensitive consumption, we are expecting the housing market to continue to expand which will continue to encourage consumption in this sector. Some consumers even appear to be planning major purchases before interest rates rise. According to the Conference Board’s Consumer Confidence Index, the share of consumers planning to purchase a home in the next six months rose to a cycle high in April, while those planning to buy a major appliance also rose noticeably higher. These confident consumer appetites should foster continued growth in this sector.

Source: U.S. Department of Commerce and Windergate Capital

Lagging Behind: Motor Vehicles and Parts

One sector of durable goods consumption in which pent-up demand expectations have not risen to the occasion has been the motor vehicles and parts sector. Although traditionally the most volatile sector of durable goods consumption, due to its inclusion of big ticket-items like automobile purchases, this sector has remained well below its long-run trend. As we highlighted in our 2013 report, this shift in behavior seems to have pre-dated the Great Recession. However, the sector’s behavior seems to have fundamentally changed since the Great Recession, as motor vehicles and parts consumption has picked up lately, but remains almost 16 percent below its long-run trend (Figure 7). This deviation from trend still marks an improvement from about 28 percent below trend in 2010.

Source: U.S. Department of Commerce and Windergate Capital

Normally, this sector is one of the hardest hit during a recession. Perhaps one of the few exceptions was during the 2001 recovery (orange line in Figure 8), as almost zero percent interest rates on the purchase of automobiles, which were introduced after the September 11 terrorist attack, kept consumption elevated despite the downturn experienced in 2001. However, as these near-zero percent interest rates have remained until recently, it is clear that they did not have the same effect during the recovery from the Great Recession. That is, low interest rates have not been able to completely reverse the damage created by the past recession. Not only was the decline in consumption severe during the Great Recession, but the recovery process has been slow compared to other recovery cycles. However, the recovery seems to have started to pick up steam lately.
This slow recovery has been particularly evident in the purchase of new motor vehicles, which remains extremely weak even though it has been showing some improvement over the past several quarters (Figure 9). However, the purchase of new light trucks, that is, the purchase of SUVs , pick-up trucks and minivans, has shown some strength relatively recently. In fact, this sector is the only one that has been recovering in the new motor vehicles market in the past several years, even as this remains the weakest recovery for this sector of motor vehicles compared to previous business cycles (Figure 10).

Source: U.S. Department of Commerce and Windergate Capital

Recent trends in the new motor vehicle market are consistent with a shift in Americans tastes for motor vehicles. Since about 2014, vehicle preferences seem to have changed dramatically, producing an important departure from the recent past as consumers have chosen to buy more light trucks than regular automobiles (Figure 11 & Figure 12). The market share of light trucks has gone from about 50 percent in 2013 to about 69 percent today, while the market share for autos has dropped from about 50 percent in 2013 to about 31 percent today.

Source: U.S. Department of Commerce and Windergate Capital

The used vehicle market also appears to have bucked the motor vehicle trend lately. The purchase of used autos has picked up steam after a long and weak recovery from the Great Recession. Similarly, the used light truck market was slow to recover, but has gained strength relatively recently. Despite some recent strength, the current recovery of consumption for both of these sectors remains the weakest when compared to previous recoveries, which, again, reaffirms the lasting impact of the Great Recession on this sector.

The overall story of motor vehicles and parts consumption may seem negative; however, we may look at it as a glass half-full rather than a glass half-empty. There appears to be plenty of potential pent-up demand that has not yet been realized during this recovery, while other metrics of the motor vehicle markets look positive for improvement.

Back when we conducted our 2013 analysis, the average age of vehicles on the road for cars was 11.4 years and 11.3 years for light trucks. This measure has been growing almost unabated since the 1990s. As of 2016, which is the most recent data available, those numbers are even higher, both at 11.6 years respectively, which means that the U.S. automobile market has continued to age and is perhaps well poised to grow faster at some point in the future. Furthermore, not only have Americans been driving older cars, but they have also cut expenditures for automobile maintenance during this business cycle recovery compared to previous recoveries. This may be related to owning better-built vehicles today than in the past, but it also presents an opportunity, as the age of cars on the road potentially make them even more susceptible to being replaced sooner rather than later.

The Outlook for Durable Goods Consumption

Personal consumption was severely impacted by the Great Recession. While the consumption of durable goods as a whole underwent a deep and long recovery, specific sectors bounced back rather quickly, while others still have yet to fully recover. No area of durable goods consumption, however, presents a glaring risk to continued economic growth at this time. We expect spending to continue in recreational goods and vehicles as demographic shifts continue to spur increased demand for this component of spending. Similarly, furnishings and durable household equipment are likely to continue to see elevated levels of consumption as the housing market is expected to remain strong for the foreseeable future. While demand appears soft presently for the motor vehicle and parts sector, we anticipate pent-up demand to develop in coming years, as underlying dynamics suggest an aging auto market warranting renewed investment.

We do, however, acknowledge the sensitivity associated with durable goods spending, and the volatile nature of this component of consumption. Although we remain optimistic on the consumer in coming quarters, we emphasize that monetary policy tightening as well as unforeseen events have the potential to alter consumer behavior, but perhaps more importantly, consumer expectations. While higher interest rates can directly weigh on durable goods consumption, due to the increased cost of expensing larger purchases (which often accompany this component of spending), we do not expect the gradual tightening process from the record low level of rates that exist today to halt consumption. If anything, we may see increased consumption in the near term as individuals take advantage of the lower rates that still exist today. Political uncertainties or market volatility, however, have the potential to impact consumer expectations. While consumers’ expectations about their future economic position often impacts how they will consume today, such expectations are vital for durable goods consumption. That said, confidence indicies remain at or near cycle highs, which demonstrate the optimistic nature of consumers at present about their current and expected economic position. Such elevated confidence conditions remain supportive of continued growth in durable goods consumption in the quarters ahead.