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Chart 5 Expenditures
Household Equipment

for

Percent change, annual rate
Furniture
15

and appliances

TV, stereo. etc.
Other household
equipment I

10

5

0

-5

-10

r

1984
1982
1983
1981
1. Consists primarily of china and tableware, floor
coverings. linens. and tools.
SOURCE: U.S. Department of Commerce, Bureau
of Economic Analysis. National Income and Product
Accounts.

required by these newly formed
households probably has helped sustain the rapid growth of spending
for household equipment.
Many econometric investigations of the demand for household
equipment focus on the relationship between spending for household durables and some measure of
housing activityf However, survey
evidence suggests taking a broader
view and examining household
moving patterns from one housing unit to another-whether
the
move is to a new or existing home,

-

5. See, for example, the Wharton model as reo
ported in Michael D. Mcf.arthy, Wharton Ouarterly Econometric Forecasting Model, Mark III.
University of Pennsylvania. 1972.

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 44101

••

Address Correction
Requested:
Please send
corrected mailing label to the Federal Reserve
Bank of Cleveland. Research Department.
PO. Box 6387. Cleveland. OH 44101.

and whether the household head is
a homeowner or renter. The 1970
and 1977 Consumer Credit Surveys
obtained information on purchases
of household durable goods by
duration of occupancy for owners
and renters." These survey data
showed significantly higher spending levels on household durablesespecially big-ticket items-for
households that had changed their
place of occupancy. Furthermore,
the surveys suggest that the impact
on spending probably is distributed over several quarters after the
move is made.
Data on moving activity from
the Interstate Commerce Commission show that tonnage hauled by
major household goods carriers was
growing at an extremely rapid rate
through the first half of 1984. Given
the apparent distributed lag relationship between change of housing
unit and purchases of household
durables, these moving data not only
help explain the spending strength
during 1983 and the first part of
1984, but they also suggest continued support for spending on furniture, appliances, and other household equi pmen t during the remainder
of 1984 and into 1985.
Finally, it should be noted that just
as the electronic "chip" has caused
a technological revolution in business
equipment and stimulated capital
spending, there also has been a
technological revolution in house-

-

hold durable goods. This no doubt
has been an important stimulant to
spending for high-tech consumer
goods (many of which are included
in the "furniture and appliances"
component of consumption expenditures) as households attempt
to incorporate the latest technology
into their stock of durable goods.
Conclusion
The surge in spending for postponable, high-durability consumer goods
during 1983 and the first half of 1984
reflected a combination of several
factors: very favorable income and
balance sheet trends; an improvement in many of the determinants of
demand specific to various goods;
and the effects of rapid technological change. While we can only
guess at the extent to which these
spending gains have closed the
gap between the actual and desired
stock of high-durability goods, the
magnitude of these outlays suggests that it has been narrowed a
fair amount. Consequently, growth
in the demand for high-durability
goods is likely to begin to slow during the second half of 1984 and into
1985. Nonetheless, the underlying
determinants of consumption spending remain quite favorable, so that
even after the surge in pent-up
demand has been satisfied, longrun growth in consumer outlays
should be relatively robust.

6. See, for example. 1977 Consumer Credit Survey. Federal Reserve Board, December 1978, p. 77
(table 17-7). Analogous data from the 1983 survey
are not available. This hypothesis and supporting data were suggested to me by Susan Burch.

BULK RATE
U.S. Postage Paid
Cleveland, OH
Permit No. 385

Federal Reserve Bank of Cleveland

The Recovery
of Durable Goods:
What Exhilarated
the Consumer?
by Lawrence Slifman
Much of the strength in domestic
demand during the first half of 1984
was in the consumption sector.
This is not unusual for a recovery.
Consumption spending typically
rises rapidly in the first four quarters of a recovery and often continues to expand at a healthy pace
as the economy moves into the second year of expansion. As shown in
chart 1, the cyclical rise in total
consumption spending during the
first year and a half of the recovery
was well within the range of previous postwar experience, rising a
total of 8.7 percent. What was unusual, however, was the strength of
demand for postponable, relatively
durable consumer goods-especially
spending for household equipment,
such as furniture, kitchen appliances, and electronic goods, as well
as outlays for clothing and shoes.
Spending for these goods had
suffered considerably during the
stagflation of the late 1970s and
early 1980s. This extended period
of sluggish household investment
undoubtedly left a sizable pent-up
demand. With the cyclical rebound
in income growth that began in
early 1983, the improvement in

-

Lawrence Slifman is assistant director, Division
of Research and Statistics. Board of Governors of
the Federal Reserve System. The author appreciates the assistance of Tracey Butler and Barbara
Kenlaw in the preparation of this article.

ISSN 0428-1276
August 27, 1984

household financial positions, and
the drop in consumer borrowing
rates from their 1982 highs, households attempted to satisfy this pentup demand and narrow the gap between actual and desired stocks. As
a result, real expenditures for highdurability goods-line 2 of table 1rose nearly 20 percent during the
first 6 quarters of the current recovery, more than a third faster than
the average performance. At the
same time, the cyclical expansion in
low-durability goods and servicesline 7-was slower than average.
The right-hand pair of columns
puts the behavior of consumption
spending during the first half of
1984 in a cyclical context by comTable 1 Cyclical Comparison
of Consumer
Percent change
Trough to t + 6
Average
Current
recovery
recovery"
1. Total PCE

8.1

Or!
T

!

I

,

1

2

,

!

!

,

!

!

3 4 5 6 7 8 9
Quarters from trough

,

!

SOURCE: U.S. Department of Commerce. Bureau
of Economic Analysis. National Income and Product
Accounts.

Spending
Trough to

t

+4

t

+

4 to t

+

6

Average

Current

Average

Current

8.7

5.8

5.7

2.3

3.0

2.1
-3.9
3.2

7.3
9.8
6.2

2. High-durability goods
3. Cars and trucks
4. Household
equipment
5. Other consumer
durables
6. Clothing and shoes

14.5
34.0b
12.1

19.9
34.4
19.4

12.4
37.9b
9.0

12.6
24.6
13.2

15.3

15.8

9.7

9.6

5.6

6.2

7.9

16.1

6.3

7.7

1.6

8.4

7. Low-durability goods

6.3

5.3

3.9

3.7

2.4

1.6

a. Average for the recoveries following the troughs in 1954. 1958. 1961. 1970. and 1975.
b. Adjusted for the 1970:IVQ auto strike. which artificially depressed sales in the trough quarter.
SOURCE: U.S. Department of Commerce. Bureau of Economic Analysis. National Income and Product Accounts.

paring the gains in the current
cycle with the average performance
between the fourth and sixth quarters of previous expansions. As can
be seen, all of the high-durability
components were unusually strong
in the first half of 1984, with the
7.3 percent gain for the total (line 2)
about 3lj2times faster than usual.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors
of the Federal Reserve System.

r

10 11 12

To understand the reasons for this
unusual strength and assess the
implications for the outlook, this
Commentary analyzes the fundamental determinants of consumer
spending on postponable, highdurability goods.

Chart 2 Real Disposable Income

Table 2 Household Financial Positions
Percent of disposable income

Billions of 1972 dollars

1976-80

1983

1984:1"

900

800

I

I

1974

I

I

1976

I

I

1978

I

I

1980

I

,

1982

!

,

1984

r

SOURCE: U.S. Department of Commerce. Bureau
of Economic Analysis. National Income and Product
Accounts.

Cyclical Determinants of
Durable-Goods Purchases
Income trends. As shown in chart 2,
the growth of real disposable income has been extremely strong
since early 1983-rising at about a
7 percent annual rate. As a result,
real income-which
had fallen well
below its longer-run trend during
the 1981-82 recession-has
now
climbed well above its trend line.
In addition to the well-established
link between longer-run income
trends and consumption spending,
cyclical movements in incomesuch as the recent surge-also
affect the timing of consumer purchases of high-durability, postponable items. This is reflected, for
example, in surveys of consumer
attitudes, which show that periods
of rapid real income growth are
well correlated with high levels of
consumer confidence and buying
intentions for autos and other bigticket items. One reason is that
rapid income growth, and the drop
in unemployment that typically is
associated with cyclical income
gains, reduces cash-flow constraints
for households and improves perceptions of longer-run income prospects} With the likelihood of financial distress lower, consumers are
more willing to shift the composition of their portfolios away from
liquid financial assets and toward
illiquid consumer goods; thus,

1. This argument is based on Frederic Mishkin,
"Consumer Sentiment and Spending on Durable
Goods;' Brookings Papers on Economic Activity,
1:1978. pp. 217-31. For an opposing view on this
hypothesis, see Ben S. Bernanke, "Permanent

6.7
4.4

6.2
5.1

5.0
2.7

5.9
3.0

Outstandings, end of period
3. Financial net worth

/

/ 1973-83 trend

6.1
2.3
149.1

149.2

160.8

168.1

161.5

4. Assets
5. Liquid assets"
6. Liabilities

1.000

••

1982

Average flowduring period
1. Personal saving
2. Financial saving-

1.100

or

1981

228.1
115.3
79.0

228.8
115.4
79.6

240.3
118.2
79.5

249.4
120.1
81.3

243.4
122.5
81.9

39.2

38.6

41.7

42.4

44.2

7. Memo:Liquid net worth>

a. Financial saving equals personal saving minus net investment in owner-occupied housing.
b. Liquid assets equal holdings of deposits and credit market instruments (except corporate equities). Liquid net
worth equals liquid assets minus outstanding credit market liabilities.
SOURCE: Board of Governors of the Federal Reserve System. Flow of Funds Accounts.

other things equal, they will tend
to increase their purchases of relatively high-durability goods when
income is rapidly rising.
If capital markets were perfect-in the sense that households
always could borrow against future
labor income without penaltythere would be no cash-flow constraints: the consumption plans of
households would be constrained
only by their expected lifetime
resources. Capital markets are not
perfect, however, and cash-flow difficulties can affect the timing of
household consumption decisions.
In particular, rapid cyclical gains in
income increase the resources available for down payments, improve
the ability of households to meet
existing debt repayment obligations, and provide funds to service
additional installment credit.
Borrowing costs. The effect of
strong income growth on consumer
spending was augmented in 1983
and in the first half of 1984 by
reduced credit costs. Interest rates
on consumer credit peaked in late
1981 and early 1982-with rates on
auto loans around 17 percent to
18 percent. But these rates began to
fall in mid-1982, and by the spring
of 1983 they had declined to the
13 percent to 14 percent range; borrowing costs for new autos generally have remained in this range
since. This decline in rates lowered
the total interest payment on a
48-month new-car loan by as much
as $1,225-a 30 percent reduction
in total financing charges.

Income, Liquidity, and Expenditure on Autornobiles: Evidence from Panel Data;' Quarterly [ournal of Economics, vol. XCIX, no. 3 (August 1984).
pp.587-614.

Balance sheets. Income and borrowing costs are not the only factors affecting household consumption decisions. Household balance
sheet trends-shown
in table 2also playa role and have been a
positive influence on the recent
strength of spending. As shown on
line 2, during 1981 and 1982 households devoted an unusually large
share of their income to the acquisition of financial assets, helping to
shore up liquidity positions-line
5.
Although the rate of financial saving has come down somewhat over
the past year and a half from the
1981-82 pace, it is still above the
average of the late 1970s, and the
liquid asset ratio remains high. On
balance, even though households
have been borrowing at a very rapid
rate, increasing the debt-income
ratio (line 6), liquid net worth positions (line 7) remain quite strong.
Thus, consumers find themselves
holding a relatively large buffer
against hard times, thereby reducing the likelihood of financial distress and increasing the willingness of households to purchase
illiquid durable goods.
Determinants of Auto Demand
An important source of consumption growth during the first half of
1984 was the rapid rise in purchases
of consumer-use cars and trucks.
The expansion of consumer auto
and truck sales got off to a comparatively slow start during the first
year of the recovery-a 25 percent rise versus an average gain of
nearly 40 percent. However, demand

strengthened as the recovery moved
into its second year, bringing the
cumulative expansion during the
first six quarters well within the
range of previous experience. The
strength of consumer purchases of
motor vehicles reflected not only
the income and balance sheet influences that generally affected spending for all durable goods, but also
a number of demand factors specific
to the auto market.
Replacement demand. One of the
key factors is replacement demand.'
The age distribution of the auto
stock (chart 3) has shifted dramatically over the past decade. As
the operating costs and prices of
new cars jumped during the mid1970s and again during the early
1980s, an increasing number of car
owners-faced
with sticker shockdecided to conserve on the number of miles driven and to hold on
to their cars longer. This decline
in the scrappage rate of older cars
led to a sharp fall-off in replacement
demand between 1979 and 1983.
As these older cars wear out, they
will have to be replaced; and with
so many older cars on the road, the
potential replacement needs have
become enormous. For example,
the percentage of cars more than
10 years old in 1983 was double
the figure recorded in 1975. How
much of the strength in auto sales
during 1984 represents replacement
demand? The answer depends not
only on the size of the potential
replacement pool, but also on scrappage rates for each model year. Data
on scrappage rates for 1984 will not
be available until the summer of
1985; however, if scrappage for each
age group of cars were to remain
unchanged between 1983 and 1984,
replacement demand would be as
much as 7 million units.
Operating costs and vehicle miles.
There are reasons to think that
scrappage rates have increased this
year. In part, this is because of the
strength in real income. However,
the suspicion that scrappage rates
have increased also is related to
recent trends in operating costs
and driving demands.

••

2. See Michael F Bryan, "Issues in the 1983
Auto-Sales Outlook;' Economic Commentary,
Federal Reserve Bank of Cleveland, March 7,
1983.

As shown in chart 4, the cost per
mile of operating a car has dropped
nearly 5 percent since 1981, reversing the upward trend evident during the 1970s. The decline in operating costs primarily is a result
of the softness in gasoline prices
associated with the world oil glut.
Reflecting the drop in the cost
of operating a car, as well as the
strength of overall economic activity, Americans have been driving
much more during the past two
years. According to data compiled
by the Department of Transportation, passenger car travel in the
United States is up about 9 percent
since the first half of 1982, after
showing little change, on balance,
during the preceding three years.
A rise in vehicle miles-a measure of the total demand for automobile services-can
be satisfied in
two ways: a rise in the intensity
with which the current stock of cars
is used (which can increase replacement demand), and net additions to
the stock. During the current expansion, drivers apparently have been
doing both. The average number
of miles each car is driven per year
has risen considerably since 1981,
returning to 9,400 miles-about
the
level in 1979. But more intensive
use shortens the service-life of an
automobile. And the more the stock
consists of older cars, the greater
the likelihood that intensive use
will cause these carsto be scrapped
sooner. Burch (1983) has estimated
that a shift in scrappage rates back
to the 1979 pattern-the
last time
cars were driven about 9,400 miles
per year on average-would
boost
replacement demand to roughly
10 million units.' Although this figure is well above actual replacement
needs in 1984 (because scrappage
rates probably have not reverted all
the way back to the 1979 pattern),
it is indicative of the impact that a
rise in scrappage rates could be
having on auto demand.
The Demand for
Household Equipment
Another important contributor to
GNP growth during the first half of
1984 was consumer spending for
household equipment-chart
5. Real

••

3. The calculations are based on the work reo
ported in Susan W. Burch, "The Aging U.S. Auto
Stock: Implications for Demand;' Business Economics, vol. XVIII, no. 3 (May 1983), pp. 22-26.

Chart 3
Automobiles in
Use Older than
10 Years
Percent

20

Chart 4
Passenger Car
Operating Costs
Cents per mile

25

16
20
12

SOURCE: Motor Vehicle Manufacturers Association,
Motor Vehicle Facts and Figures '84. pp. 24 and 43.

spending for this component of consumer durables-which
in dollar
terms is nearly 75 percent larger
than outlays for new autos-rose
at an 11 percent annual rate in the
first half of 1984, following a similar rise in 1983. The recent gains in
spending for household equipment
were widespread across all major
categories and followed a period of
considerable weakness during 1980,
1981, and much of 1982. This period
of extended sluggish investment in
household equipment during the
early 1980s probably created a sizable pent-up demand, which consumers attempted to satisfy once
borrowing costs fell and household
income and net worth positions
improved as the recovery progressed.
In addition to the strong demand
associated with the previous spending shortfalls, outlays for household equipment also have been
buoyed by a strengthening in some
of the other factors that determine
the desired stock of these goods.
One such factor is the number of
new households formed during the
past year. The household formation
rate dropped precipitously from
1.6 million in 1981 to only 400,000
in 1983. Over the past year, the
figure has nearly quadrupledreturning to a more 7pical Ph million new households. Furnishing the additional housing units

-

4. Of course, household formation and real
income developments are not independent.

Chart 2 Real Disposable Income

Table 2 Household Financial Positions
Percent of disposable income

Billions of 1972 dollars

1976-80

1983

1984:1"

900

800

I

I

1974

I

I

1976

I

I

1978

I

I

1980

I

,

1982

!

,

1984

r

SOURCE: U.S. Department of Commerce. Bureau
of Economic Analysis. National Income and Product
Accounts.

Cyclical Determinants of
Durable-Goods Purchases
Income trends. As shown in chart 2,
the growth of real disposable income has been extremely strong
since early 1983-rising at about a
7 percent annual rate. As a result,
real income-which
had fallen well
below its longer-run trend during
the 1981-82 recession-has
now
climbed well above its trend line.
In addition to the well-established
link between longer-run income
trends and consumption spending,
cyclical movements in incomesuch as the recent surge-also
affect the timing of consumer purchases of high-durability, postponable items. This is reflected, for
example, in surveys of consumer
attitudes, which show that periods
of rapid real income growth are
well correlated with high levels of
consumer confidence and buying
intentions for autos and other bigticket items. One reason is that
rapid income growth, and the drop
in unemployment that typically is
associated with cyclical income
gains, reduces cash-flow constraints
for households and improves perceptions of longer-run income prospects} With the likelihood of financial distress lower, consumers are
more willing to shift the composition of their portfolios away from
liquid financial assets and toward
illiquid consumer goods; thus,

1. This argument is based on Frederic Mishkin,
"Consumer Sentiment and Spending on Durable
Goods;' Brookings Papers on Economic Activity,
1:1978. pp. 217-31. For an opposing view on this
hypothesis, see Ben S. Bernanke, "Permanent

6.7
4.4

6.2
5.1

5.0
2.7

5.9
3.0

Outstandings, end of period
3. Financial net worth

/

/ 1973-83 trend

6.1
2.3
149.1

149.2

160.8

168.1

161.5

4. Assets
5. Liquid assets"
6. Liabilities

1.000

••

1982

Average flowduring period
1. Personal saving
2. Financial saving-

1.100

or

1981

228.1
115.3
79.0

228.8
115.4
79.6

240.3
118.2
79.5

249.4
120.1
81.3

243.4
122.5
81.9

39.2

38.6

41.7

42.4

44.2

7. Memo:Liquid net worth>

a. Financial saving equals personal saving minus net investment in owner-occupied housing.
b. Liquid assets equal holdings of deposits and credit market instruments (except corporate equities). Liquid net
worth equals liquid assets minus outstanding credit market liabilities.
SOURCE: Board of Governors of the Federal Reserve System. Flow of Funds Accounts.

other things equal, they will tend
to increase their purchases of relatively high-durability goods when
income is rapidly rising.
If capital markets were perfect-in the sense that households
always could borrow against future
labor income without penaltythere would be no cash-flow constraints: the consumption plans of
households would be constrained
only by their expected lifetime
resources. Capital markets are not
perfect, however, and cash-flow difficulties can affect the timing of
household consumption decisions.
In particular, rapid cyclical gains in
income increase the resources available for down payments, improve
the ability of households to meet
existing debt repayment obligations, and provide funds to service
additional installment credit.
Borrowing costs. The effect of
strong income growth on consumer
spending was augmented in 1983
and in the first half of 1984 by
reduced credit costs. Interest rates
on consumer credit peaked in late
1981 and early 1982-with rates on
auto loans around 17 percent to
18 percent. But these rates began to
fall in mid-1982, and by the spring
of 1983 they had declined to the
13 percent to 14 percent range; borrowing costs for new autos generally have remained in this range
since. This decline in rates lowered
the total interest payment on a
48-month new-car loan by as much
as $1,225-a 30 percent reduction
in total financing charges.

Income, Liquidity, and Expenditure on Autornobiles: Evidence from Panel Data;' Quarterly [ournal of Economics, vol. XCIX, no. 3 (August 1984).
pp.587-614.

Balance sheets. Income and borrowing costs are not the only factors affecting household consumption decisions. Household balance
sheet trends-shown
in table 2also playa role and have been a
positive influence on the recent
strength of spending. As shown on
line 2, during 1981 and 1982 households devoted an unusually large
share of their income to the acquisition of financial assets, helping to
shore up liquidity positions-line
5.
Although the rate of financial saving has come down somewhat over
the past year and a half from the
1981-82 pace, it is still above the
average of the late 1970s, and the
liquid asset ratio remains high. On
balance, even though households
have been borrowing at a very rapid
rate, increasing the debt-income
ratio (line 6), liquid net worth positions (line 7) remain quite strong.
Thus, consumers find themselves
holding a relatively large buffer
against hard times, thereby reducing the likelihood of financial distress and increasing the willingness of households to purchase
illiquid durable goods.
Determinants of Auto Demand
An important source of consumption growth during the first half of
1984 was the rapid rise in purchases
of consumer-use cars and trucks.
The expansion of consumer auto
and truck sales got off to a comparatively slow start during the first
year of the recovery-a 25 percent rise versus an average gain of
nearly 40 percent. However, demand

strengthened as the recovery moved
into its second year, bringing the
cumulative expansion during the
first six quarters well within the
range of previous experience. The
strength of consumer purchases of
motor vehicles reflected not only
the income and balance sheet influences that generally affected spending for all durable goods, but also
a number of demand factors specific
to the auto market.
Replacement demand. One of the
key factors is replacement demand.'
The age distribution of the auto
stock (chart 3) has shifted dramatically over the past decade. As
the operating costs and prices of
new cars jumped during the mid1970s and again during the early
1980s, an increasing number of car
owners-faced
with sticker shockdecided to conserve on the number of miles driven and to hold on
to their cars longer. This decline
in the scrappage rate of older cars
led to a sharp fall-off in replacement
demand between 1979 and 1983.
As these older cars wear out, they
will have to be replaced; and with
so many older cars on the road, the
potential replacement needs have
become enormous. For example,
the percentage of cars more than
10 years old in 1983 was double
the figure recorded in 1975. How
much of the strength in auto sales
during 1984 represents replacement
demand? The answer depends not
only on the size of the potential
replacement pool, but also on scrappage rates for each model year. Data
on scrappage rates for 1984 will not
be available until the summer of
1985; however, if scrappage for each
age group of cars were to remain
unchanged between 1983 and 1984,
replacement demand would be as
much as 7 million units.
Operating costs and vehicle miles.
There are reasons to think that
scrappage rates have increased this
year. In part, this is because of the
strength in real income. However,
the suspicion that scrappage rates
have increased also is related to
recent trends in operating costs
and driving demands.

••

2. See Michael F Bryan, "Issues in the 1983
Auto-Sales Outlook;' Economic Commentary,
Federal Reserve Bank of Cleveland, March 7,
1983.

As shown in chart 4, the cost per
mile of operating a car has dropped
nearly 5 percent since 1981, reversing the upward trend evident during the 1970s. The decline in operating costs primarily is a result
of the softness in gasoline prices
associated with the world oil glut.
Reflecting the drop in the cost
of operating a car, as well as the
strength of overall economic activity, Americans have been driving
much more during the past two
years. According to data compiled
by the Department of Transportation, passenger car travel in the
United States is up about 9 percent
since the first half of 1982, after
showing little change, on balance,
during the preceding three years.
A rise in vehicle miles-a measure of the total demand for automobile services-can
be satisfied in
two ways: a rise in the intensity
with which the current stock of cars
is used (which can increase replacement demand), and net additions to
the stock. During the current expansion, drivers apparently have been
doing both. The average number
of miles each car is driven per year
has risen considerably since 1981,
returning to 9,400 miles-about
the
level in 1979. But more intensive
use shortens the service-life of an
automobile. And the more the stock
consists of older cars, the greater
the likelihood that intensive use
will cause these carsto be scrapped
sooner. Burch (1983) has estimated
that a shift in scrappage rates back
to the 1979 pattern-the
last time
cars were driven about 9,400 miles
per year on average-would
boost
replacement demand to roughly
10 million units.' Although this figure is well above actual replacement
needs in 1984 (because scrappage
rates probably have not reverted all
the way back to the 1979 pattern),
it is indicative of the impact that a
rise in scrappage rates could be
having on auto demand.
The Demand for
Household Equipment
Another important contributor to
GNP growth during the first half of
1984 was consumer spending for
household equipment-chart
5. Real

••

3. The calculations are based on the work reo
ported in Susan W. Burch, "The Aging U.S. Auto
Stock: Implications for Demand;' Business Economics, vol. XVIII, no. 3 (May 1983), pp. 22-26.

Chart 3
Automobiles in
Use Older than
10 Years
Percent

20

Chart 4
Passenger Car
Operating Costs
Cents per mile

25

16
20
12

SOURCE: Motor Vehicle Manufacturers Association,
Motor Vehicle Facts and Figures '84. pp. 24 and 43.

spending for this component of consumer durables-which
in dollar
terms is nearly 75 percent larger
than outlays for new autos-rose
at an 11 percent annual rate in the
first half of 1984, following a similar rise in 1983. The recent gains in
spending for household equipment
were widespread across all major
categories and followed a period of
considerable weakness during 1980,
1981, and much of 1982. This period
of extended sluggish investment in
household equipment during the
early 1980s probably created a sizable pent-up demand, which consumers attempted to satisfy once
borrowing costs fell and household
income and net worth positions
improved as the recovery progressed.
In addition to the strong demand
associated with the previous spending shortfalls, outlays for household equipment also have been
buoyed by a strengthening in some
of the other factors that determine
the desired stock of these goods.
One such factor is the number of
new households formed during the
past year. The household formation
rate dropped precipitously from
1.6 million in 1981 to only 400,000
in 1983. Over the past year, the
figure has nearly quadrupledreturning to a more 7pical Ph million new households. Furnishing the additional housing units

-

4. Of course, household formation and real
income developments are not independent.

Chart 5 Expenditures
Household Equipment

for

Percent change, annual rate
Furniture
15

and appliances

TV, stereo. etc.
Other household
equipment I

10

5

0

-5

-10

r

1984
1982
1983
1981
1. Consists primarily of china and tableware, floor
coverings. linens. and tools.
SOURCE: U.S. Department of Commerce, Bureau
of Economic Analysis. National Income and Product
Accounts.

required by these newly formed
households probably has helped sustain the rapid growth of spending
for household equipment.
Many econometric investigations of the demand for household
equipment focus on the relationship between spending for household durables and some measure of
housing activityf However, survey
evidence suggests taking a broader
view and examining household
moving patterns from one housing unit to another-whether
the
move is to a new or existing home,

-

5. See, for example, the Wharton model as reo
ported in Michael D. Mcf.arthy, Wharton Ouarterly Econometric Forecasting Model, Mark III.
University of Pennsylvania. 1972.

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 44101

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Address Correction
Requested:
Please send
corrected mailing label to the Federal Reserve
Bank of Cleveland. Research Department.
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and whether the household head is
a homeowner or renter. The 1970
and 1977 Consumer Credit Surveys
obtained information on purchases
of household durable goods by
duration of occupancy for owners
and renters." These survey data
showed significantly higher spending levels on household durablesespecially big-ticket items-for
households that had changed their
place of occupancy. Furthermore,
the surveys suggest that the impact
on spending probably is distributed over several quarters after the
move is made.
Data on moving activity from
the Interstate Commerce Commission show that tonnage hauled by
major household goods carriers was
growing at an extremely rapid rate
through the first half of 1984. Given
the apparent distributed lag relationship between change of housing
unit and purchases of household
durables, these moving data not only
help explain the spending strength
during 1983 and the first part of
1984, but they also suggest continued support for spending on furniture, appliances, and other household equi pmen t during the remainder
of 1984 and into 1985.
Finally, it should be noted that just
as the electronic "chip" has caused
a technological revolution in business
equipment and stimulated capital
spending, there also has been a
technological revolution in house-

-

hold durable goods. This no doubt
has been an important stimulant to
spending for high-tech consumer
goods (many of which are included
in the "furniture and appliances"
component of consumption expenditures) as households attempt
to incorporate the latest technology
into their stock of durable goods.
Conclusion
The surge in spending for postponable, high-durability consumer goods
during 1983 and the first half of 1984
reflected a combination of several
factors: very favorable income and
balance sheet trends; an improvement in many of the determinants of
demand specific to various goods;
and the effects of rapid technological change. While we can only
guess at the extent to which these
spending gains have closed the
gap between the actual and desired
stock of high-durability goods, the
magnitude of these outlays suggests that it has been narrowed a
fair amount. Consequently, growth
in the demand for high-durability
goods is likely to begin to slow during the second half of 1984 and into
1985. Nonetheless, the underlying
determinants of consumption spending remain quite favorable, so that
even after the surge in pent-up
demand has been satisfied, longrun growth in consumer outlays
should be relatively robust.

6. See, for example. 1977 Consumer Credit Survey. Federal Reserve Board, December 1978, p. 77
(table 17-7). Analogous data from the 1983 survey
are not available. This hypothesis and supporting data were suggested to me by Susan Burch.

BULK RATE
U.S. Postage Paid
Cleveland, OH
Permit No. 385

Federal Reserve Bank of Cleveland

The Recovery
of Durable Goods:
What Exhilarated
the Consumer?
by Lawrence Slifman
Much of the strength in domestic
demand during the first half of 1984
was in the consumption sector.
This is not unusual for a recovery.
Consumption spending typically
rises rapidly in the first four quarters of a recovery and often continues to expand at a healthy pace
as the economy moves into the second year of expansion. As shown in
chart 1, the cyclical rise in total
consumption spending during the
first year and a half of the recovery
was well within the range of previous postwar experience, rising a
total of 8.7 percent. What was unusual, however, was the strength of
demand for postponable, relatively
durable consumer goods-especially
spending for household equipment,
such as furniture, kitchen appliances, and electronic goods, as well
as outlays for clothing and shoes.
Spending for these goods had
suffered considerably during the
stagflation of the late 1970s and
early 1980s. This extended period
of sluggish household investment
undoubtedly left a sizable pent-up
demand. With the cyclical rebound
in income growth that began in
early 1983, the improvement in

-

Lawrence Slifman is assistant director, Division
of Research and Statistics. Board of Governors of
the Federal Reserve System. The author appreciates the assistance of Tracey Butler and Barbara
Kenlaw in the preparation of this article.

ISSN 0428-1276
August 27, 1984

household financial positions, and
the drop in consumer borrowing
rates from their 1982 highs, households attempted to satisfy this pentup demand and narrow the gap between actual and desired stocks. As
a result, real expenditures for highdurability goods-line 2 of table 1rose nearly 20 percent during the
first 6 quarters of the current recovery, more than a third faster than
the average performance. At the
same time, the cyclical expansion in
low-durability goods and servicesline 7-was slower than average.
The right-hand pair of columns
puts the behavior of consumption
spending during the first half of
1984 in a cyclical context by comTable 1 Cyclical Comparison
of Consumer
Percent change
Trough to t + 6
Average
Current
recovery
recovery"
1. Total PCE

8.1

Or!
T

!

I

,

1

2

,

!

!

,

!

!

3 4 5 6 7 8 9
Quarters from trough

,

!

SOURCE: U.S. Department of Commerce. Bureau
of Economic Analysis. National Income and Product
Accounts.

Spending
Trough to

t

+4

t

+

4 to t

+

6

Average

Current

Average

Current

8.7

5.8

5.7

2.3

3.0

2.1
-3.9
3.2

7.3
9.8
6.2

2. High-durability goods
3. Cars and trucks
4. Household
equipment
5. Other consumer
durables
6. Clothing and shoes

14.5
34.0b
12.1

19.9
34.4
19.4

12.4
37.9b
9.0

12.6
24.6
13.2

15.3

15.8

9.7

9.6

5.6

6.2

7.9

16.1

6.3

7.7

1.6

8.4

7. Low-durability goods

6.3

5.3

3.9

3.7

2.4

1.6

a. Average for the recoveries following the troughs in 1954. 1958. 1961. 1970. and 1975.
b. Adjusted for the 1970:IVQ auto strike. which artificially depressed sales in the trough quarter.
SOURCE: U.S. Department of Commerce. Bureau of Economic Analysis. National Income and Product Accounts.

paring the gains in the current
cycle with the average performance
between the fourth and sixth quarters of previous expansions. As can
be seen, all of the high-durability
components were unusually strong
in the first half of 1984, with the
7.3 percent gain for the total (line 2)
about 3lj2times faster than usual.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors
of the Federal Reserve System.

r

10 11 12

To understand the reasons for this
unusual strength and assess the
implications for the outlook, this
Commentary analyzes the fundamental determinants of consumer
spending on postponable, highdurability goods.