The Cyclical Behavior of Consumption

Personal consumption expenditures, or simply Consumption, mainly refer to spending by households.

It includes spending on durable goods, such as new cars; spending on nondurable goods, such as groceries; and spending on services, such as healthcare.

Consumption is often procyclical and coincident with the business cycle.

During a recession, fewer job opportunities and lower wages reduce households’ disposable income. With lower disposable income, households have less money to spend, so they reduce their spending. On the other hand, during expansions, more job opportunities and rising wages increase households’ disposable income. With higher disposable income, households have more money to spend, so they increase their spending.

But spending on durable goods changes more sharply over the business cycle.

This means it increases by a large amount during expansions and decreases by a large amount during contractions.

Spending on durable goods is easier to delay because households can continue using what they already own. For instance, during a recession, households may delay buying a new car since their current car still provides the needed service.