Structural Breaks and Future Growth of the Green Industry

Abstract

Every industry undergoes changes, but structural changes can abruptly and radically alter business for many firms in that industry. Identifying the substantial shifts in the green industry with regard to consumer spending can help the industry better understand its history. Using an econometric model of that same consumer spending data to look forward to the future can show firms what might lie ahead. We analyzed the personal consumption expenditures for two items measured by the U.S. Bureau of Economic Analysis to identify structural breaks in the green industry. We then conducted an econometric forecast using that same data to predict future consumer spending projections to the year 2020. To accomplish this, we analyzed household expenditures for Tools (including gardening tools and equipment) and Plants (including seeds, flowers, and plants) from 1959 to 2014. We identified one industry structural break using the Schwarz criteria for Tools in 2006 and another one for Plants in 2007 and (separately) identified four breaks using Bayesian Information criteria: one break for Tools in 2006 and three breaks in Plants in 1986, 2003, and 2008. The potential causes of these breaks are discussed (e.g. housing bubble, financial market stress). Lastly, we employed an econometric model to forecast spending and show that it will grow from $65.15 and $86.52 in 2015 to $71.17 and $96.97, for Tools and Plants respectively, in 2020.