Macro-Economic Implications of Curtailment and Life-Cycle Change

Citation:

Gunter Poser (1983) ,"Macro-Economic Implications of Curtailment and Life-Cycle Change", in NA - Advances in Consumer Research Volume 10, eds. Richard P. Bagozzi and Alice M. Tybout, Ann Abor, MI : Association for Consumer Research, Pages: 163-168.

Advances in Consumer Research Volume 10, 1983      Pages 163-168

MACRO-ECONOMIC IMPLICATIONS OF CURTAILMENT AND LIFE-CYCLE CHANGE

Gunter Poser, Darmstadt Institute of Technology

I. INTRODUCTION

When in 1973 the OPEC countries decided to triple their oil prices people felt that not only energy prices would go up due to this measure. After the first shock had worn off people began to realize that our way of life can change quickly and drastically from one day to another and they became aware of a growing uncertainty. Economists, social psychologists, politicians, and marketing researchers were wondering how the consumer would react. Consumer surveys in Europe and in the USA revealed that the consumer was willing to change his life-style; that is, he was willing to be more conscious of energy consumption and of his environment, to waste less and to preserve resources. This appreciation of a different way of life was supported by a growing political movement for anti-pollution. The willingness to save energy and other materials was supported by the world-wide recession that followed the energy crisis.

Meanwhile we had the sane experience a second time. In the year 1979 prices for OPEC-oil tripled again and in the beginning of 1980 another recession followed that is not yet over.

The seeps of economic policy taken in western countries to cope with the new economic situation differed considerably. The US government seemed to hope in 1973 that the US could escape the recession by allowing the price level to go up. Germany adopted a more restrictive strategy and was able to keep inflation and unemployment within bounds. This restrictive policy was not adopted in the USA until after 1979. Another development that affected the US and German economies differently is the change of the international monetary system in the seventies. Floating exchange rates for Germany caused a sudden deterioration of her international competitiveness. But although the economic situations in Germany and in the US have not been alike during the last ten years there were many parallels.

The reaction of consumers to the energy crises and subsequent recessions was very similar in both countries and although there are, of course, many differences in detail some general observations made in Germany may also apply to the US and other economies.

In the following sections I will examine the structural changes in private consumption that were observed in the seventies. Changes on the supply side, especially impacts of changing consumption on employment, are not examined. The paper is structured as follows:

section II: deals with the long term structural change of private consumption,

section III: deals with the influence of relative prices on produce groups,

section IV: deals with the influence of income changes on product groups,

section V: deals with the development of selected expenditures since 1979,

section VI: contains the summary and conclusions.

II. STRUCTURAL CHANGE OF PRIVATE CONSUMPTION

Since the nineteen-fifties we can observe a slowdown of growth rates of real per capita CNP in Germany and accordingly also a slow-down of growth rates of real per capita disposable income. In other words: real disposable personal income has been growing with cyclical fluctuations, but the trend has been downward and last year (1981) per capita disposable income has declined in real terms for the first time.

While the affluence of private households grew considerably, private consumption as a proportion of macroeconomic demand has diminished from 48% in 1960 to 43% in 1979. This decline is due to the relative growth of exports and public spending and has taken place continuously during the last decades at both cyclical upswings and downswings.

The slowing down of growth rates of private consumption has led some investigators to the conclusion that production and employment are going to be curtailed owing to increasing saturation. This conclusion was drawn especially after the first sharp rise of energy prices in 1973 and during the subsequent recession when consumers in Germany showed an unprecedented high propensity to save. But as shall be shown below, the propensity to spend went up again and consumer credit grew considerably during the seventies. Taking consumer building expenditures into account, more than 90% of disposable income has been spent (except for the 1975 recession). Therefore, it can safely be concluded that so far, private consumption has not reached the general saturation point yet.

As a whole, private consumption in Germany has clearly been a stabilizing factor in business cycles. The growth rate of private consumption has the smallest variance of the growth rate of all components of CNP, a smaller one even than that of the growth rates of disposable income.

There was, however, a remarkable change in the structure of private consumption during the past decades and there arc certainly signs of saturation on specific markets and even in whole sectors of private demand. The most pronounced structural change between 1960 and 1978 was the decline of expenditures for food and the growth of expenditures for consumer durables. The main reasons for this development were the continuous rise of disposable income and the fall in the birth rate. Younger households with fewer children and especially those without children have a higher propensity to consume and a special inclination to purchase durables. In addition, relative prices of most durables declined and therefore attracted more demand.

Measured in constant prices the share of expenditures for durables has grown from 14.2% to 20.4%. At the same time expenditures for food and everyday-products (including clothing, shoes, detergents, incidental expenses etc.) went down from 44.1% to 39.9%. This trend has not changed after 1973 or 197¦ (see table 1).

TABLE 1

STRUCTURE OF PRIVATE CONSUMPTION BY TYPE OF EXPENDITURES IN CURRENT AND CONSTANT PRICES - 1970-1978 (%)

THE INFLUENCE OF RELATIVE PRICES ON CONSUMPTION

As can be expected, there is a correlation between the development of relative prices and the development of demand. The demand for most products with rising relative prices has decreased and the demand for most products with declining relative prices has increased. To the second group belong mainly products that could profit from large scale industrial production and productivity gains, to the first group belong foodstuffs, incidental expenses, and services (including public transportation, hotels and restaurants, hairdressers, laundries, cleaning services etc.) (See table 2).

TABLE 2

DEVELOPMENT OF RELATIEV PRICES AND STRUCTURAL CHANGE OF PRIVATE CONSUMPTION - TREND 1962 - 1972, IN PRICES OF 1970 -

In addition, there are two groups of products, that do not behave as expected:

In one group the demand went down although relative prices went down also) for instance milk, fat, eggs, dairy products, underwear, writing material). These are products that are considered 'inferior' in the hierarchy of consumer preferences.

The other group consists of those products that attracted more purchase power although relative prices went up (including car repair, travelling expenses, and services of banks and insurance companies). These are all products with high income elasticities.

It is of special interest to us to see what has happened during the last ten years. For this purpose we divide our data base into two periods: 1962-1971 and 1972-1979. The results show that the energy crisis of 1973 has had a strong influence on price development. Whereas in the nineteen-sixties industrial products, energy and food became less and less expensive (compared to the average price of consumer goods), in the nineteen seventies not only energy itself became more expensive but, beside chat, the relative prices of industrial goods no longer declined as quickly as before. But what is more striking is the number of those products that attracted more purchasing power while their relative prices increased. They do not only include fuel, oil, gas, and electricity. They also include most items that had belonged to that group before and, in addition, passenger cars. This means that there can be no doubt that the energy crisis and recession had a strong influence on the development of prices but the hierarchy of consumer preferences does not seen to have changed very much.

IV. INFLUENCE OF INCOME CHANGES ON CONSUMER DEMAND

Income elasticities are usually computed to measure the distance-to the saturation point. High income elasticities are supposed to show an expanding demand; they become smaller the more the household's aspiration level is met. Table 3 contains income elasticities for a number of durables calculated from three large household cross sections of the years 1962, 1973, and 1978.

TABLE 3

EQUIPMENT OF PRIVATE HOUSEHOLDS WITH CONSUMER DURABLES - CROSS SECTION DATA -

In the majority of cases the income elasticities went down according to the growing equipment of households with durables. There are only three exceptions: motorcycles, radios and stereo-sets. This seems to show that changing preferences and technical innovations (like video-technology, new sound mediums) are well able to attract purchasing power.

If consumers behave as the development of income elasticities suggests it can be concluded that in society there exists a widely accepted hierarchy of preferences. With rising income households adopt habits of those that had reached this income level before. But there are also movements that cannot be explained by income change. They can be called complementary and substitutive developments.

Examples for complementary goods are frozen food or electricity. They are complementary to household goods and bought independently from income and price developments. Examples for substitutive goods are services from laundries and cleaners which were substituted by washing machines or the services of theaters, movies, and sporting events which were substituted by television sees, radio recorders, and stereo sets and cannot count on attracting more demand with rising income. German cross section results do not support the hypothesis that a new era of services is approaching. Most traditional services are on the decline. Only the demand for modern services like those of banks, insurance and health institutions are increasing.

In addition, the data suggest that consumer preferences are directed towards better health. People prefer non-alcoholic drinks, consume less tobacco, try to avoid fat, and so on. Although a great deal of expenses for personal health are supplied by public institutions, privately paid medicines and hospital and doctor bills rose considerably and so did expenditures for all kinds of sports-articles. That people also continue to prefer cars and individual transportation, television and individual entertainment and that they continue to use the services of institutions to care for the elderly and disabled, seems to show that personal independence is still an important goal.

Expenditures for cars have grown throughout the seventies. They still show structural gains because households prefer better equipped cars with more efficient engines.

One of the reasons that consumer demand did not decline despite declining income elasticities was the change of household size. During the last decade the number of one-and-two-person households has grown considerably. This is another aspect of the growing individualism. According to the consumption theory small households have a high propensity to consume. The data show, that small households seem to exert a considerable influence on the demand structure: for nearly all products that could gain market shares, the income elasticities of small households were greater than those of the average households.

V. DEVELOPMENT OF SELECTED EXPENDITURES SINCE 1979

More recent developments in consumption in Germany can be investigated through the use of a special data base con,piled by the German Federal Bureau of Statistics. It consists of an annual survey of about 1000 households representing three important groups:

Type I: household's with two older persons who receive a low income (approximately at the poverty line).

Type II: households with four persons (including two children, one of them younger than 15 years). The head of the household is employed as a blue or white collar worker earning an about average income.

Type III: equals Type II except that the head of the household earns a higher income (the difference between Type I and II income is approximately the same as between Type II and III).

Heads of households were asked to record all earnings and expenditures during one year. They represent about one million households of similar characteristics, which, is about 6% of all German households.

These data allow the investigation of the following questions:

How did the consumers surveyed react to the second sharp rise in energy prices in 1979 and to the subsequent recession?

Do these reactions differ from their reactions to the energy crisis in 1973 and the 1975 recession.

In 1981 there were only three expenditure groups in which households with higher incomes had to pay smaller parts of their income than households with lower incomes: food, housing, and energy. In all other groups the high income households spent higher percentages of their income than low income households (see figure 1).

FIGURE 1

HOUSEHOLD EXPENDITURES (IN%)

This is nearly the same result as in 1975 with the exception that percentages in 1981 were a little closer for all types of households. There have not been remarkable changes after 1975. The development of the propensity to save is shown in figure 9.

FIGURE 2

SAVINGS RATES OF PRIVATE HOUSEHOLDS

In the economic recession during the two successive years (1974/75 and 1980/81) households reacted by saving more. This is probably the most remarkable new reaction of consumers in recent years. Before that, consumers that reacted to business cycles by trying to maintain their former level of consumption. In other words: in periods of high growth of income their propensity to save went up and vice versa.

Nowadays people seem to be willing to save more in situations of low growth rates of income and of growing uncertainty, thus increasing the business cycle movement. However, for the period from 1979 to 1881 it has to be mentioned that the high level of interest rates was an additional reason for consumers to save. From 1979 to 1981 the high interest rates induced not only a very high savings rate but people also preferred bonds to an unprecedented amount (German Central Bank, 1989, p. 20). As a consequence, households prefer to postpone expenditures for those products with which households are already well equipped.

This is the major macroeconomic danger of current levels of saturation: the segment of consumer durables as well as that of high-grade services, (lawyers, hotels, restaurants) have to hear ar increasing share of business cycle In uncertainty.

With our data base we are also able to trace household expenditures of those groups of products that have become especially interesting in recent years. These are:

1. expenditures for gas, oil and electricity,

2. expenditures for car maintenance and fuel,

3. expenditures for recreation and vacations.

1. Expenditures for gas, oil, and electricity

Whereas in 1979 households were unable to escape- the sudden rise of energy prices which led to increased expenditures for oil up to 100%, in 1980 expenditures for gas, oil, and electricity did not rise by more than 6% and in 1981 by less than 4% (see figure 3)

FIGURE 3

EXPENDITURES FOR ELECTIRCITY, GAS AND HEATING MATERIALS (IN % OF TOTAL PRIVATE CONSUMPTION)

This low rate of increase could only he achieved by a strong motivation to save energy. As a first reaction in 1973, households turned down the thermostats. But later on further reactions were necessary installation of more efficient heating systems, insulation of houses, and substituting gas, electricity and even coal for oil. The result of these measures was that from 1979 to 1981 the oil consumption of households was reduced by nearly 20%. The volume of oil necessary to heat 1 square meter in one and two family houses reduced from 40.9 liter before 1973 to 35.7 liter in 1978, 31.6 liter in 1979 and 27.8 liter in 1980 (Schiffer, 1981, p. 303-3-4).

2. Expenditures for car maintenance and fuel

Expenditures for car maintenance (including fuel, repairs, parts, garage rents, car taxes and insurance) have gone up continuously. During the years 1980 and 1981 the gain was only due to increasing fuel costs. Consumers have tried to keep expenditures down by using inspection and repair services less frequently and by saving fuel.

For the whole economy this effort has had the effect that for the first time in West Germany's history fuel consumption has gone down although the number of cars with gasoline engines is still increasing.

This means that the strong correlation of the increase of the number of cars with fuel consumption that can be observed until 1978 has not only been reduced but for 1981 even reversed. While the stock of cars increased by 1.55 in 1981, fuel consumption went down by 5.1%. This is the result of an increase in fuel efficiency (achieved by driving more slowly and by using more efficient engines) on the one side and of a reduction of the annual mileage on the other side. The former reason makes up 30% of the reduction, the latter 70%. As a consequence, the average fuel bill per car that would have risen by at least 42% (the increase of the price of gasoline from 1979 to 1981) went up by only 31% (Schiffer, 1981, p. 302).

It has to be mentioned here, that this willingness to save does not seem to apply to car purchases in the same way. Although there was a clear trend towards smaller cars in Germany until 1980 (the percentage of newly built cars with engines below 1500 cm went up-from 30.5% in 1976 to 39% in 1980) the percentage of larger cars (above 2000 cm3) went up, too. This seems to correspond to information of US car producers who have also announced higher production rates for large cars (for instance Chrysler's 'Le Baron' and Pontiac's 'Firebird') because there is a stronger demand for them now (Fall 1982).

3. Expenditures for recreation and vacation

Consumers are assumed to spend a greater part of their income on recreation even in times of recession.

This can be examined by comparing the development of expenditures for recreation and vacation with the income development for the three types of households in our data base during the period 1973-1981.

TABLE

This comparison supports the above assumption. But in 1981 this development stopped. The expenditures for recreation in 1981 did not increase as before in households of Type II and III and the expenditures for vacation did not go up as before, either. In households of Type I and II they even declined slightly. This is a new observation and it cannot be said yet if this development will continue. First information about the 1982 season seems to indicate that at least the expenses for vacation trips are declining again.

VI. SUMMARY AND CONCLUSION

Consumer surveys after the oil crisis in 1973 and during the subsequent recession revealed that consumers in western countries were ready to change their life-style: away from the former habit of wasting resources and away from conspicuous consumption (Poser/Shipchandler, 1979). Consumers seemed to become less pretentious, more interested in simple products, more aware of the necessity to save (Shama, 1981). This willingness to change their life-style and way of life had strong implications on specific product markets. But it is not easy to identify these implications on the change of total consumption and its components because single market movements are averaging out.

Whereas in the past private consumption was a stabilizing factor in business cycles (showing the smallest variance of growth rates of all components of GNP) the growing part of expenditures for consumer durables causes stronger ups and downs during the business cycle, thus leaving the economy more instable. In addition business cycle movements in recent years were intensified by changing savings behavior. This is not only caused by the current high level of interest rates. Above all, it seems to be the result of a stronger inclination of consumers to save money in times of growing economic and political uncertainty.

German consumers have also managed to save large amounts of heating energy and of gasoline during the last few years with a strong positive impact on the German balance of payments. It is, however, difficult to say, if energy saving is part of a changed life-style and related to the engagement of consumers in voluntary simplicity behaviors (Shama, 1981, Leonard-Barton, 1931) or if it has merely to be attributed to the extraordinarily large increase in energy prices. Some scholars doubt that people have changed their attitudes towards saving and simplicity.

This view is supported by the results of a number of surveys in which people were asked what attributes they would like their children to have. At the beginning of the nineteen-seventies the answer was that they should be proficient, independent, family-oriented, orderly and so on. Moderation and willingness to be content with less were the last two qualities that parents wished for their children at that time. It is interesting to note that ten years later this result had not changed although people say that they are much more saving-minded as before. The same holds true for the younger generation, aged 16 to 29 years. To them moderation and willingness to be content with less was not even worth mentioning (Szallies, 1981, p. 32).

Using price and income elasticities it could be shown that the hierarchy of consumer preferences has changed but slightly. Recent information from passenger car producers seems to indicate that prestige consumption is not a thing of the past.

The current recession is going to be deeper than anticipated by most observers. Consumers are reducing their expenditures even for those products and services (for instance for recreation and vacation) that are on the top of their preferences. But consumer confidence that has been at an unprecedented low value in the last quarter of 1981 and in the first quarter of 1982 (in Germany and in the whole European Community) (Kommission der Europaischen Gemeinschaften, 1982) has gone up again. Concluding from what has been observed in the recession after 1973 this can be interpreted as an indication that private consumption is going to rise very soon. Concluding from the slow change of preferences in the past the composition of expenditures in the years to come can be predicted easily. It will be in line with the long term trend with only minor modifications caused by life-style changes .

REFERENCES

Deutsche Bundesbank (1982), Monatsberichte, 5, p. 20.

Ifo-Institut fuer Wirtschaftsforschung (1981), Strukturberichterstattung 1980, Berlin/Muenchen: Duncker & Humblot.

Kolumission der Europaeischen Gemeinschaften (1989) Konjunkturaussichten-Ergebnisse der Verbraucherutafrage , Europaeische Wirtschaft, C 2.

Leonhard-Barton, Dorothy (1981), Voluntary Simplicity Lifestyles and Energy Conservation , Journal of Consumer Research, 8, 243-252.

Poser, Gunter and Shipchandler, Zoher E. (1979), Impact of Inflation on Consumer Life Style , European Journal of Marketing, 13, 103-112.

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