Consumer Spending Trends and Current Statistics
Consumer Spending Up 3.8 Percent
Consumer spending was $13.6 trillion at the end of 2017. The Bureau of Economic Analysis reports consumer spending at an annualized rate. That's so it can compare it to economic output, measured by gross domestic product. For the same quarter, GDP was $19.7 trillion. Consumer spending contributes to 69 percent of the U.S. economy.
Two-thirds of consumer spending is on services, such as housing and health care.
Almost one-quarter is spent on non-durable goods, such as clothing and groceries. The rest is spent on durable goods, such as automobiles and appliances. Personal Consumption Expenditures lists more sub-categories on what consumers spend.
Consumer Trends Show Softness
Consumer spending increased 3.8 percent in the fourth quarter of 2017. Strong consumer spending is the main reason the GDP growth rate has been within the 2-3 percent healthy range since the Great Recession.
The Bureau of Labor Statistics reported that the average American spent $57,311 in 2016.
(Source: "2016 Consumer Expenditures, " Bureau of Labor Statistics, August 29, 2017.)
As a result, U.S. retail sales are strong. Total holiday sales rose 4.1 percent. That's higher than the 10-year average of 3.5 percent annual increase before the recession.
But only 135.7 million people shopped on the three-day Black Friday weekend in 2016. That's because they waited for online sales later in the season. Consumer spending trends show a definite move toward online shopping versus shopping in brick-and-mortar stores.
Five Reasons Why Consumer Spending Took So Long to Recover
Although spending is doing well now, it took a long time for it to bounce back from the recession.
First and most important, millions of people went back to school to find new careers. That cut back on shopping. Credit card debt has never returned to pre-recession levels. Instead, school loans rose to their highest levels in history. Education and auto loans are the two largest components of consumer debt.
Second, rising income inequality has hurt consumer spending. Average income levels have not kept pace with growth in either the stock market or GDP. That's partly because jobs have been outsourced to cheaper labor in China, India, and low-wage manufacturing in Asia. Calls to eliminate NAFTA and other free trade agreements have been ignored so that manufacturers can't afford to hire U.S. workers and stay in business. As a result, households have cut back on spending and increased saving. That's also led to lower consumer confidence. Many analysts look to the Consumer Confidence Index to predict how likely it is consumers will spend. That's because people are more likely to shop when they feel confident about their ability to get a better paying job. Consumer confidence has been only gradually trending up since July 2007.
Third, people now demand goods and services at an ever cheaper price.
That is largely thanks to technology. If you can get a more advanced TV next year for the same price as this year's model, you'll be more than happy to wait until next year to get a new product. The internet has destroyed the pricing ability of many media industries, such as books, movies, and music. Technology has made workers more productive, requiring fewer of them.
Fourth is a shift to thrift. During the recession, shoppers searched for the cheapest prices possible. That ensured the success of Walmart and dollar stores. As the economy started to improve, a funny thing happened. They didn't return to the full-price stores. Instead, a shift occurred. A 2010 Alix Partners Retail Survey found that consumers were buying "good enough" products and were pleasantly surprised that they were "good enough." They were even willing to travel further to achieve a good value for a reasonable price.
Americans were not a focused on retaining their standard of living as they were before the financial crisis. During the housing boom, they used their home equity like an ATM. They also ran up credit card debt. The subprime mortgage crisis combined with credit card debt restrictions curtailed debt as a source of funds. High unemployment cut back on wages. As a result, consumer spending is likely to remain fairly flat for the foreseeable future.
Why These Trends Are Important to the U.S. Economy
Since PCE is reported monthly, it gives an early indication of that quarter's real GDP. Consumer spending is the most important component of GDP. That makes it one of the most important leading economic indicators. If it is flat, so is economic growth.
Retailers have had to cope with flat incomes since the recession. They also had to contend with shoppers who expect higher value combined with low prices. Amazon and other online stores have stolen a lot of business. Companies who depend on either a low cost or a high-value competitive advantage have fallen behind. Instead, they must provide both.
Those companies that don't get it right could lose their customers and never get them back. Shoppers are willing to drive further to get a good deal since they have more time than money. Not all low-cost stores are doing well. If they don't provide the value, they are out of business. It also means that all high-priced stores aren't necessarily doomed, as long as the customer feels they are getting a good value for the price.
This shift may keep the foot on the brake of economic growth for the near future. If you own a business, take a good hard look at the value you provide for the price. Shop your competition. Best of all, talk to your customers. These are all good practices in normal times, but critical during a shift to thrift.