The fallout from the Great Recession has so far cost more than $7,300 (U.S.), or about $175 a month, per person in lost consumption, says a new paper released by the Federal Reserve Bank of San Francisco.
Coming right on the heels of a consumer spending binge fuelled by a housing bubble, the recession “triggered a dramatic shift in household spending behaviour,” wrote senior economist Kevin Lansing in the paper released Monday.
The “large” $7,300 figure reflects the period from December, 2007 to May, 2011, and was calculated by comparing the trajectory of real personal consumption expenditures to pre-recession trends, Mr. Lansing said.
Real personal consumption expenditures – the amount individuals spend on goods and services – trended down for six quarters, while the personal savings rate more than tripled from 2 per cent to over 6 per cent, Mr. Lansing said.
The paper compared the 1990 recession – triggered by the combination of an oil price shock and a credit crunch – to the Great Recession of 2008. While it took 23 months for consumption per person to return to its pre-recession peak after the initial recession, 42 months have elapsed since the start of the Great Recession and consumption per person is still 1.6 per cent below its pre-recession peak, Mr. Lansing said.
Mr. Lansing writes that the pre-recession consumption trend was “almost surely not sustainable because much of the household debt that helped finance that spending was collateralized by bubble-inflated housing values, [and] consumption was bound to slow sooner or later.”
“The recession has had many costs, including negative impacts on labour and housing markets, and lost government tax revenues,” Mr. Lansing said. “The extensive harm of this episode raises the question of whether policy makers could have done more to avoid the crisis.”
He argued that it is possible for central banks to take steps to identify and prevent or deflate asset price bubbles.