*Paying for gas image via shutterstock. Reproduced at Resilience.org with permission.*

Among the disappointments in the 2015:Q1 GDP figures was weak consumption growth, which was a little surprising given the extra cash most consumers have on hand as a result of lower energy prices. I wanted to take a look at how the recent consumer behavior compares with what we’ve seen historically.

The graph below plots the price of energy goods and services relative to the overall price consumers pay for other purchases. Real energy prices have fallen about 20% from where they had been last summer.

*Figure 1. Ratio of implicit price deflator for*

*energy goods and services*

*to overall*

*PCE deflator*

*, monthly 1959:M1 to 2015:M3.*

*Figure 2. Consumer purchases of*

*energy goods and services*

*as a percentage of*

*total consumption spending*

*, monthly 1959:M1 to 2015:M3.*

*xt*. Thus for example if the energy share is 5% and the price increases 20%,

*xt*would equal 1, corresponding to the 1% loss of spending power described above. They then related

*xt*to the monthly growth rate of real consumption spending. They used data from 1970:M7 to 2006:M7 to estimate a pair of forecasting equations to predict

*xt*and real consumption growth based on observed values of the two variables over the previous 6 months. The black line in the graph below shows how an

*n*-month ahead forecast of real consumption in that system would change when

*xt*goes up by 1, a graph that economists describe as an “impulse-response function”. The green lines indicate 95% confidence intervals. Historically, an energy price increase that reduces consumer spending power by 1% would on average be followed within a few months by a 1% decline in real consumption spending and by closer to a 2% decline by the end of 6 months. One interpretation of why the latter effect is bigger than 1% is that it could reflect second-round macroeconomic multiplier effects of the lower consumer spending.

*Horizontal axis: months after an increase in energy prices that would lower consumer spending power by 1% at time 0. Vertical axis: predicted percent change in real consumption spending between month 0 and month n. Source: based on*

*Hamilton’s (2009)*

*replication of*

*Edelstein and Kilian (2007)*

*.*

*Black: 100 times the natural log of real consumption spending, 2006:M9 to 2008:M9, normalized at 100 for 2007:M9. Blue: forecast from the*

*Edelstein and Kilian vector autoregression*

*using only data as of 2007:M8. Green: forecast from the vector autoregression conditioning on observed energy prices over 2007:M9 to 2008:M8. Source:*

*Hamilton (2009)*

*.*

The blue line shows the predicted path for consumption based only on consumption and energy data available in September of 2007, while the green line shows the path predicted given the big increase in energy prices between September 2007 and July of 2008. The graph indicates that about half of the slowdown in consumption growth during the first three quarters of the Great Recession could be attributed to energy prices.

*Black: 100 times the natural log of real consumption spending, 2013:M9 to 2015:M3, normalized at 100 for 2014:M7. Blue: forecast from an updated*

*Edelstein and Kilian vector autoregression*

*using only data as of 2014:M7. Green: forecast from the vector autoregression conditioning on observed energy prices over 2014:M8 to 2015:M3.*