Analytics

The Hidden Message in How Americans Spend

Consumer spending increased by 3.7% in June, the highest 12-month smoothed monthly increase in almost two years, according to data released last week by the Bureau of Economic Analysis.

This year, Americans will spend $12 trillion on stuff, slightly more than the $11.7 trillion they spent on stuff last year.

These gross numbers are pretty meaningless and hard to wrap one’s mind around, but if we look behind the big numbers at what we’re spending our money on, and how some of those expenditures are growing, it’s not only pretty interesting, but can also tell us about how optimistic we’re feeling, about our consumer preferences as a society, and where we might be headed.

When the government tracks consumer spending, it creates two major categories: goods, which are separated into durables like cars and washing machines, and nondurables like clothes and food; and services, such as private school tuition, cab fare, eating in restaurants, and going to the doctor.

What I’d like to do here, though, is to categorize them a little differently.

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Abraham Maslow (remember him from Psychology 101?) created the theory of the hierarchy of needs; simply stated that self-actualization is not possible until our basic needs are met. So, using a pyramid as a model, shelter, food and clothing (physiological needs) are the most basic needs at the base.

Fast forward to the top, creativity and artistic pursuits, are defined as self-actualization, or achieving our full potential as human beings. I’m super-simplifying here, but you get the idea. So if we look at trends in consumer spending through a redefined prism of Maslow’s hierarchy, and taking a few liberties with the climb to the top, some interesting patterns emerge. We can start with non-discretionary (need) categories like food, clothing and shelter at the base, and discretionary purchases, (more wants than needs) like restaurant dinners and new cars at the top.

So how have Americans been spending their money? And what’s behind these spending trends?

 

Level 1: Food, Clothing, Shelter (Basic Needs)

For one thing, it looks like the American Dream is alive and well, and home is still where the heart is – at least the heart of non-discretionary spending. As the chart below illustrates, spending on housing, which totaled an annualized $2 trillion as of June 2014 data, has been growing much faster than groceries and apparel, the other two key need categories, whose totals were $900 billion and $367 billion, respectively. Much of this increase has been due to tightened supplies of rental properties and energy costs, which have driven up monthly housing and utility costs, causing people to dedicate a larger share of their wallet to housing costs. Despite rock-bottom interest rates, home purchases have been about as spotty as job market recovery, resulting in an increased demand for homes to rent.

Although food prices have risen for certain categories, like meat and dairy, large supermarket chains are in a tough race for market share, which has kept inflation to a minimum and allowed consumers to take advantage of loss-leader bargains. In both apparel and groceries, showrooming has enabled price transparency across competitive retailers. As the chart shows, although spending on housing rose by 4% last month, slightly ahead of the total spending increase of 3.7%, spending on groceries rose by less than 2% and apparel spending edged up by less than 1%. In other words, Americans are spending more on housing because they have to, and taking advantage of the promotional environment in apparel and food to because they can.

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Level 2: Health and Wellbeing (Safety)

Next, let’s look at how we are spending on keeping ourselves healthy, the next level up on our redefined hierarchy of needs spending pyramid. Consumption of pharmaceuticals has skyrocketed in recent months as millions of formerly uninsured people got coverage under the Affordable Care Act and began to take medications for chronic illness and other conditions, causing windfalls for Big Pharma companies and the major drug store chains. However, spending on medical services and other forms of healthcare has grown by just over 3% as hospitals, clinics and physicians find their ability to bill patients is extremely limited under the new health care legislation. More people are going to doctors, according to CMS, the service that administers Medicare, but total spending is being offset by the declining average cost of a doctor treatment or visit. Maybe the Affordable Care Act is actually keeping health care affordable? Time will tell.

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Level 3: Quality of Life Connections (Belonging)

Next, let’s take a look at some spending categories up a little higher on the hierarchy of values: feel-good “big ticket” items. The auto industry has benefitted greatly in the past year by the unleashing of pent-up demand. During the recession, car sales declined because people decided they would just make do with their old clunkers. Once the economy started to grow again and employment and income started to recover, millions went out en masse and purchased new cars. However, that growth started to slow considerably early last year, as shown by the chart below, and then picked up again starting in February of this year. Although new car sales are strong, at an annualized $98 billion in June, they’re not growing as much as they were in early 2013, though part of that is due to tougher comparisons— that is, they’re being compared to stronger months than they were in early 2013.

Another interesting category in this realm is communication ($276 billion), which includes mobile device (smart phone) contracts, where growth is an annualized 4%, but off from the higher levels seen last year, primarily because the tablet craze has quieted considerably.

And growth in furniture and appliance spending, representing a total of $287 billion, remains sluggish despite the improved stability in the housing market. The lack of consumer interest in the category has been a source of tremendous frustration for retailers in this space. Perhaps a good bit of the softness in spending is due to the extremely competitive and promotional marketplace – prices have been declining for these products, and consumers are taking advantage of the available deals to spend less.

RELATED:   Neiman Marcus Innovates a Resale Model

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Level 4: Having Fun (Esteem)

We’re approaching the top of the spending pyramid, where some of the most discretionary of the major consumer purchase categories reside, specifically entertainment. Key categories include recreational activities spending, at $450 billion, products like toys and sporting goods, at $367 billion, and spending on food outside the home, at $746 billion. Of the three, eating out is the only one with accelerating growth. In the hierarchy of needs, it reflects confidence and achievement that consumers have choice to reward themselves with a slightly more expensive option than cooking at home. And the fact that we’re spending moderately on recreation says that we’re having some fun.

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Level 5: Self-Improvement (Self Actualization)

At the pinnacle of all these spending categories are the self-actualized pursuits of spending on education and financial planning. Amazingly, it looks like these areas are growing at above-average rates; we’re actually spending more to improve our ability to succeed in the future. Education spending, at $282 billion, is one of the fastest growing categories in consumer spending (after pharmaceuticals). And not all that surprisingly, given the volatility of the financial markets, spending on financial services is growing quickly as well, at an annualized $890 million according to June 2014 figures. This data would suggest that we are optimistic about the future, interested in self-improvement and searching for, and funding, solutions.

Despite what is happening in the economy or in Washington, people are living their lives and hanging on to their dreams.

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