Consumer Spending Trends and Current Statistics
Consumer Spending Up Just 0.9%
Consumer spending was at a rate of $14.67 trillion as of the third quarter of 2019. The Bureau of Economic Analysis reports consumer spending at an annualized rate. That's so it can compare it to gross domestic product, which was $21.53 trillion. Consumer spending made up 68% 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. The Personal Consumption Expenditures Report lists more sub-categories on what consumers spend.
Consumer Trends Show Softness
But U.S. retail sales were soft. Total holiday sales only rose by 2.3%. That's lower than the 10-year average of 3.5% annual increase before the recession. Fewer people shopped on the three-day Black Friday weekend in 2018. 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. Department store sales fell by 3.3% while online retailers saw a 3.7% increase over last year.
The Bureau of Labor Statistics reported that the average American spent $60,060 in 2017, the most recent figures available.
(Source: "2017 Consumer Expenditures, " Bureau of Labor Statistics, September 11, 2018.)
Five Reasons Why Consumer Spending Hasn't Recovered
Spending 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. But don't blame credit card debt. It only recently 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. Despite changes to NAFTA and other free trade agreements, manufacturers still can't afford to hire U.S. workers and stay in business. As a result, households have cut back on spending and increased saving.
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 as 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. Many people have never caught up. As a result, consumer spending may not recover to pre-recession levels.
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.