Consumption dynamics in Spain by product type

Private consumption explains a substantial proportion of the fluctuations in economic activity in Spain in the most recent cycle given its high weight as a percentage of GDP currently around 58% in nominal terms – and the intensity of the variations in this demand component during that period. Specifically, between the pre-crisis peak in 2008 Q1 and the trough of the recession in 2013 Q1, consumption dropped in real terms by 12.6%. Thereafter until early 2015, household spending on consumer goods and services rose by 4.8%. Fluctuations in consumption are not distributed proportionately among the different types of goods and services. Reductions in expenditure usually affect durable goods to a greater extent since households do not derive their utility directly from the current expenditure incurred but from the consumption services obtained from the products acquired. Thus, households can reduce these purchases in periods when their current income is low, with a relatively small decline in their utility, and postpone them to periods in which this income has recovered (giving rise to what is known in the literature as pent up demand). Furthermore, the adjustment in the consumption of durables may be sharper when there are adverse financial conditions which make it more difficult to obtain credit (see Arce et al, 2013). In turn, several factors prompt households to adjust their consumption of the various types of non-durable goods and services unevenly in response to a negative income shock. On one hand, there are products whose elasticity to changes in income is low because they cover basic vital needs, whereas other products are more dispensable (“non-essential consumption”). On the other, there are expenditures whose downward adjustment, especially in the short term, show a high degree of stickiness, for example, agreements entered into in earlier periods which cannot be cancelled immediately (“non-adjustable consumption”). This article studies changes in private consumption in the Spanish economy over the economic cycle from the standpoint of its breakdown by product. In particular, the role played by durables and non-staple goods and services in explaining the fluctuations in consumption is examined. National Accounts (NA) data covering the 1995-2013 period are used for this purpose, supplemented for 2014 by the results of the Household Expenditure Survey (EPF, by its Spanish abbreviation). Section 2 looks at the arguments which would suggest an asymmetrical adjustment of the various types of goods and services in the presence of income shocks and changes in expenditure on each group considered are examined, including an analysis of the contribution of prices and the real component to changes in each expenditure item. Next, a durable goods consumption model is estimated with the intention of identifying the gap between the existing durables stock and that desired by households; the latter is understood as the level which would be maintained in the absence of adjustment costs and other frictions. Lastly, a summary of the main findings is presented.