working trb 2010_#1
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Impact of Wealth
Destruction onDemand
Linda Wu
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IntroductionRecent wealth destruction
Impact on the demand for air travel?Tentative ModelsIs there an income effect? How much?Changes in demand for other modes?
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Current vs Permanent Income
CurrentDisposable Income
Personal incomegenerated after taxes
Flow
PermanentHousehold Worth
Assets LiabilitiesAssets: Tangible,financial
Liabilities:mortgages
Stock
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From the Federal Reserves Flow of Funds http://www.federalreserve.gov/releases/z1/Current/
GDP Price Deflator: http://research.stlouisfed.org/fred2/data/GDPDEF.txt
DISPOSABLE HH INCOME
DollarsinB
illions
Quarter 1990 Q1
1990 Q41991 Q3
1992 Q21993 Q1
1993 Q41994 Q3
1995 Q21996 Q1
1996 Q41997 Q3
1998 Q21999 Q1
1999 Q42000 Q3
2001 Q22002 Q1
2002 Q42003 Q3
2004 Q22005 Q1
2005 Q42006 Q3
2007 Q22008 Q1
2008 Q4
0.000
2,000.000
4,000.000
6,000.000
8,000.000
10,000.000
12,000.000
Base Year 2005
Q3 1990 - Q1 1991
Q1 2001 - Q4 2001Q4 2007 - ...
http://www.federalreserve.gov/releases/z1/Current/http://www.federalreserve.gov/releases/z1/Current/ -
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Long Range Relationship BetweenGDP/Income and Consumption
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General upward trend,
Wealth destructionFrom the Federal Reserves Flow of Funds < http://www.federalreserve.gov/releases/z1/Current/ >
NET HH WORTH
Dollarsin Billions
Quarter 1990 Q1
1991 Q21992 Q3
1993 Q41995 Q1
1996 Q21997 Q3
1998 Q42000 Q1
2001 Q22002 Q3
2003 Q42005 Q1
2006 Q22007 Q3
2008 Q4$0.00
$100.00
$200.00
$300.00
$400.00
$500.00
$600.00
$700.00
Q3 1990 - Q1 1991Q1 2001 - Q4 2001Q4 2007 - ...
http://www.federalreserve.gov/releases/z1/Current/http://www.federalreserve.gov/releases/z1/Current/ -
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Net Worth / Disposable Inc
-25.00%
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
1991 Q11992 Q11993 Q11994 Q11995 Q11996 Q11997 Q11998 Q11999 Q12000 Q12001 Q12002 Q12003 Q12004 Q12005 Q12006 Q12007 Q12008 Q12009 Q1
Quar te r
Net Worth / Disposable Income
PercentC
hange
Quarter
Change in ratio Net Worth to Disposable IncomeEconomic worthinessMore volatility Uncertainty
Long-term economic well-being.
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Who Are Most Affected and theMain Drivers? Observations from LCurve
Source: Survey of Consumer Finances , Federal Reserve Board
http://www.federalreserve.gov/pubs/oss/oss2/scfindex.htmlhttp://www.federalreserve.gov/pubs/oss/oss2/scfindex.htmlhttp://www.federalreserve.gov/pubs/oss/oss2/scfindex.html -
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Income and Wealth Distribution
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Few thoughts
Traditionally, air travel explained byincome and fare.Worked well when on trend line and
growingStructural breaks may require variablesWealth and related variables
When current income and consumption are notin balance
Households optimize present consumptionBorrow from future consumption
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-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
1 3 5 7 9 1 1 1 3 15 1 7 1 9 21 2 3 25 2 7 29 3 1 33 3 5 37 39 4 1 43 4 5 47 4 9 51 5 3 55 5 7 5 9 6 1 6 3 65 6 7 69 7 1 73 7 5
CHANG E IN PASSENGE
CHA NGE IN NET HH INC
CHANG E IN NET HH WO
Is there a correlation between change inpassengers, net HH income, and net HH worth?
Information collected from BTS Transstats
PercentChange
Time
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Passengers and Net HHWorth
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
-20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00%
Q/Q Annual Change in Passengers
Average Airfare and Passengers
-1000.00%
-800.00%
-600.00%
-400.00%
-200.00%
0.00%
200.00%
400.00%
-20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00%
Q/Q Annual Per cent Change in Passengers
Passengers and Net HH Worth
Average Airfare and Passengers
Y/Y Percent Change in HH Worth
Y/YPercentChangeinPassengers
Y/Y PercentChangein
Passengers
Y/Y Percent Change in Avg Airfare
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Inversely related
Downward sloping demand curve2002 and on affected by terrorism bias from 9/11
Note: This takes into account Nominal Average Airfare. Must take intoaccount Real Average Airfare
Average A irf are and Passengers ( % Change)
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
1991
Q1
1992
Q1
1993
Q1
1994
Q1
1995
Q1
1996
Q1
1997
Q1
1998
Q1
1999
Q1
2000
Q1
2001
Q1
2002
Q1
2003
Q1
2004
Q1
2005
Q1
2006
Q1
2007
Q1
2008
Q1
Quarter
Airfare
Passengers
Average Airfare and Passengers (% Change)
PercentChange
Quarter
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Analyzing Preliminary Charts In
DepthWhat are we looking for?Take into account external factors, biasesHow do these affect the trends?More accurate modelsModels can be used/aid forecasting"Ultimately, we are interested in the question of relativestandards of living and economic well-being. We need toexamine trends in the distribution of wealth, which, morefundamentally than earnings or income, represents ameasure of the ability of households to consume." AlanGreenspan, chairman of the Federal Reserve Bank,2007
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Recently HH worth decreased, we see number of passengers alsodecreased dramatically starting from 2008.
Loosely related. Breaks in trends around 1996, 1998, 2002-2003 (post-9/11 attacks).
Note: Nominal values
Passengers and Household Worth (% Change)
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
1991Q1
1992Q1
1993Q1
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
Quarter
Passengers
Net HH Worth
Passengers and Household Worth (% Change)
PercentChange
Quarter
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Passengers and Worth
No general pattern up to 20012001-2009 asymmetrical response
Peoples thinking/behavior changedBusiness make structural adjustmentsWill these behavior revert back to ensure
long-observed secular trends? Or are wegoing to observe a fundamentally differentdemand structure?
P E R S O N A L S AV I N G S (% C h
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Only since the 2007 recession has saving started to go up, becausepeople need to compensate for the debt they are in.
Note: Evaluate Personal Savings RATE instead.
Could increased savings be affecting the consumption of air travel?
P E R S O N A L S AV I N G S (% C h
-500.00%
0.00%
500.00%
1000.00%
1500.00%
2000.00%
2500.00%
1991 Q11992 Q11993 Q11994 Q11995 Q11996 Q11997 Q11998 Q11999 Q12000 Q12001 Q12002 Q12003 Q12004 Q12005 Q12006 Q12007 Q12008 Q12009 Q1
Quar te
P ERSONAL SAVIN
PercentChange
Quarter
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HH credit peaked then decreased rapidly after remainingsteadily increasing up until 2007.
HH borrowing less since 2007 recession because too muchdebt accumulated over time.
HH Credit (% C hange)
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
1991 Q11992 Q1 1993 Q11994 Q1 1995 Q11996 Q1 1997 Q11998 Q1 1999 Q1 2000 Q1 2001 Q1 2002 Q12003 Q1 2004 Q12005 Q1 2006 Q12007 Q1 2008 Q12009 Q1
Quarter
PercentChange
Quarter
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Credit and Savings
Net worth is enhanced by savingsHH credit decrease,
property assets across the country (ie:vacation homes)
Housing Bubble
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Housing BubbleReal estate property as safe investments,nationwide assetsSpeculative fever 2005 rise in prices, feel wealthier Subprime mortgage crisis2006-2007, teaser mortgages reset whenprices stop appreciating
High HH debt, drastic fall in price, foreclosuresincrease due to inability to refinance
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The economic impact of increased
savingsGrowing HH debt and falling savings rateFuel consumer spending but now reversingConsumption now to depend on income growth consumer spending falls,events:
Housing bubble burst,broad economic contraction,
Uncertain future, but scenarios:Income decreases, then saving increasesIncome increases, then debt burden is reduced, therefore continue to consume
Holding income constant, $100 billion less in consumer spending with each1% increase in savings rate
Therefore, income growth is difficult to overstate. HH can simultaneouslyreduce their debt, rebuild savings, and boost consumption. But withoutsignificant income gains, deleveraging could undermine consumption andthe economy.
*Atkins, Charles and Susan Lund. The economic impact of increased US savings. Economic Studies. Mar 2009. McKinsey&Company.
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CONSUMER EXPENDITURE
Consumer expenditure makes up 70% of GDPHow do people spend their money?
12.3% on food, 32.6% on housing, 1.9% oneducation, 3% on air travel
$14 trillion decline in spending 1% reductionin GDP
$98 billion will not be spent in personal consumptionFrom that, $2.94 billion will not be spent in air travel
Source: ftp://ftp.bls.gov/pub/special.requests/ce/share/2007/cucomp.txt
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Air Travel and Wealth: An Analytical Model
Air Travel
Current IncomeWealth
Air Travel
Air Travel = f(Income; wealth; Fare; )
Wealth effect
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A Simultaneous Model of Air Travel
and WealthPax = * Income + * average_fare + * Household_Worth + paxHousehold_Worth = * lnIncome + * Interest_rate + worth
Estimation Period: 1990:Q1 2009:Q1
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Summary and Conclusions
Current income is adominant factor; so isaverage fare;Household net worthappears to be animportant factor influencing air travel; so is
interest rate.
Should we incorporateeffect of wealth inestimating andforecasting air travel?What are policyimplications?How do other factors(e.g., other modes of travel) affect air travel?
VMT(%Change)
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VMT (%Change)
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
1 9 9 1
Q
1 9 9 1
Q
1 9 9 2
Q
1 9 9 3
Q
1 9 9 4
Q
1 9 9 4
Q
1 9 9 5
Q
1 9 9 6
Q
1 9 9 7
Q
1 9 9 7
Q
1 9 9 8
Q
1 9 9 9
Q
2 0 0 0
Q
2 0 0 0
Q
2 0 0 1
Q
2 0 0 2
Q
2 0 0 3
Q
2 0 0 3
Q
2 0 0 4
Q
2 0 0 5
Q
2 0 0 6
Q
2 0 0 6
Q
2 0 0 7
Q
Quarter
P e r c e n
t C h
VMT
Change in VMT fluctuates but generally decreasing toward 2009
Increase during 2001-2003 period post-9/11?Most likely not a good substitute for air travel since it fluctuates sorapidly and much, however how to explain drastic increase between2001-2003?Perhaps went down during 2007, because of recession? Gasprices?
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