The 2008-2009 economic downturn saw the largest year-to-year drop in personal consumption in the United States since 1945. A new working paper from authors at the Chicago Federal Reserve, “Consumption and the Great Recession,” utilizes recent economic data to illustrate this consumption decline. Authors De Nardi, French, and Benson find that the drop in consumption can be explained almost entirely by consumers’ expectations about their future income and changes in their current wealth.

The report offers three significant conclusions:

1. the Great Recession saw “the most severe and persistent decline” in consumption since the Second World War;
2. patterns of consumption prior to the downturn were not atypical; and
3. the recovery has been “uncharacteristically weak” with consumption levels taking three years to return to pre-recession levels. The second-longest rebound, which occurred after the 1974 recession, took just one year.

Consumption dropped 3.4% from the highest to the lowest point in the Great Recession. In all previous recessions, the study notes, consumption “fell only modestly or increased.” Consumption levels have been slower to recover, as well, growing 4.1% in total over the last 5 years. This compares unfavorably to economic performance since 1971, which shows that consumption growth averaged 15% every five years. Thus, consumer spending is 11% below the long-run average.

The authors’ microeconomic findings also illustrate weak consumer confidence.

Expected income growth by consumers — measured by how much respondents to the Reuters/University of Michigan Survey of Consumers expect their incomes to increase or decrease in the next two months — has declined significantly and is lower than pre-recession levels. During the current recovery, expected nominal income growth was actually negative for the first time ever.

This pessimism transcends age group, education level, and income level, though those in the top 20% of the wealth distribution have decreased spending the most (-5.4%), reflecting proportionately larger decreases in house and stock market values. This bleak outlook suggests that the economy “will experience low income and consumption growth over the next two years.”

Overall, the study concludes that consumption expenditures are $1.069 trillion (10%) less than they would have been if not for the Great Recession.