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Sunday, May 25, 2014

Volatility of the Components of Consumption Spending

Every now and then I create a chart that shows so incredibly clearly what we expect to see that I go back and make sure I didn't do something wrong.  This is one of those times.

I decided to look at the volatility of the three main components of consumption spending (real spending on consumer durable goods, real spending on consumer non-durable goods, and real spending on consumer services).  My measure of volatility is the absolute value of the month-to-month percentage changes in spending.  The data (from FRED) are for January 1959 to April 2014.  And this is the chart:

(Click to enlarge.)

Red is consumer durable goods, yellow is consumer non-durable goods, and green is consumer services.  And I found the results almost too good to be true, so I checked them several times.  Yep.

And the descriptive statistics go right along with it.  Durable goods spending is roughly three times as volatile as non-durable goods spending, and almost six times as volatile as spending on services.  Not only that, but the variation in changes in durable goods spending (as measured by the coefficient of variation) is also larger.






Spending Component


Mean of Monthly
Percentage
Changes

Standard Deviation of Monthly Percentage Changes

Coefficient of Variation of Monthly Percentage Changes

Real Consumer Durable Goods

Real Consumer Non-Durable Goods

Real Consumer Services

1.98%


0.60%


0.34%

1.85%


0.50%


0.23%

0.95


0.84


0.70

 Another interesting bit of data is that the price index for consumer durable goods follow a remarkably different time path than do the price indexes for non-durable or services, as the following chart reveals.
(Click to enlarge.)



2 Comments:

Anonymous Blissex said...

A rather large part of the downtrend in durable good prices has been the durable application of "rather energetic hedonic effort" to price indices since 1995:

http://conversableeconomist.blogspot.co.uk/2014/01/larry-summers-who-always-has-something.html

Obviously the prices of durable goods have not gone down by 30% since 1995, because most durable goods industries marketing strategies operate on fixed price points.

What has happened is that non-essential "quality" aspect of those durable goods have been enhanced.

So TVs today don't deliver 20 hours of entertainment for every 1 hour of watching, but they are bigger and nicer to look at.

Also AFAIK there have been essentially no "hedonic" adjustments of "price inflation" upwards when non-essential "quality" aspects of lots of goods have gone worse.

There is a comical case of petrol additives: someone found that petrol "price inflation" was "hedonically" adjusted downwards when petrol sold to consumers got additives because they improved engine efficiency, and again "hedonically" downwards when they stopped being used, because that was done to remove their bad health effects.

6:29 AM

 
Blogger doc said...

I'm not sure I'd agree that (for example), with TVs, picture size and clarity are non-essential qualities. But that's a matter of judgment. Clearly, with computers, the quality enhancements are quite real (faster, more memory, better video, etc.). And, AFAIK, the prices of airline transportation have been adjusted for worsening quality (seat size and pitch, for example), although I grant that air travel is not a consumer durable.

2:40 PM

 

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