They say economics is boring. I beg to differ. Sometimes, raw numbers on economic activity can tell fascinating stories about our time, about social change, and about how we live our daily lives.
A few days ago, the U.S. Bureau of Economic Analysis published its latest monthly update on private consumption, i.e., the numbers on how American households spend their money.
While the latest update itself was not very dramatic, it added to a fascinating trend that is changing the very landscape of both urban and rural America.
The story begins with a shift in consumer spending between two technical and—to be honest—not very interesting statistical categories:
- Goods, which include everything from food and clothes to furniture, medical supplies, computers, and cars; and
- Services, to which we count haircuts, spa visits, and air travel, as well as plumbing, tax consulting, and health care.
By studying how we choose to spend our money between these two categories, we can learn a great deal about our poverty or prosperity. We can also learn about changes in society and how they affect our economy.
For eight long decades, American consumers gradually reduced the share of their money that they spent on goods and increased spending on services. This pattern, which was taken almost as a law of nature by economists back in the last decades of the 20th century, slowly came to an end 10-15 years ago. It has now been broken, and probably will not return.
This is a big deal. Back in the 1980s and 1990s, some economists blamed the transition into a ‘services economy’ for the slowdown in economic growth in Western countries. I never bought that theory; there never was any evidence to back it up. In fact, if such evidence existed, we should see a surge in economic growth now.
We do not. The new trend, where consumers have to some degree shifted spending back to goods, began about 15 years ago, and we have not seen any improvement in GDP growth as a result of it.
Instead of linking the distribution of consumer spending to economic growth, we should link it to the level of prosperity in the economy. Back in the 1930s–the first decade for which there are comprehensive national accounts—consumers in America increased the share of their spending that went toward goods. It was not a steady trend, but it is nevertheless visible in the statistics.
This increase came at an interesting point in time. The markets for consumer goods had reached a momentum, with fully industrialized production and distribution, and with an early version of big-box retailing that we now associate with Costco or Walmart.
With large-scale, standardized production and distribution, producers and sellers of all kinds of consumer products were able to provide consumers with cheaper and often better products than had been available previously. This helped improve the purchasing power of consumers in an economy that carried them through the recovery from the Great Depression. As the 1930s unfolded, household incomes rose and more families increased their material standard of living; see phase (1) in Figure 1 below (calculations based on current prices):
Figure 1
After a pause for World War II, the improvements in consumer products, wages, and salaries accelerated into the 1950s. Consumers continued to grow their purchasing power, which led to a shift in focus of their spending. With material needs being satisfied at a lower relative cost than ever before, households in general steered more of their money into the purchasing of services (phase 2).
Thanks in large part to the automobile becoming truly affordable on the mass market, urban planners invented the first version of the American suburb. More and more American families moved out from the cities to well-planned communities from which they commuted by car to their jobs.
Living a suburban life required the purchasing of new services. Suburbanites no longer fixed their plumbing problems themselves; the new, modern lifestyle and standard of living allowed them to call an expert—and purchase his services.
Household services expanded in scope and sophistication. So did tourism: with new, more comfortable cars and more disposable income, Americans discovered vacation travel. Motels, restaurants, and other services mushroomed along the rapidly developing U.S. version of the German Autobahn: the Dwight D. Eisenhower Interstate Highway System.
Amusement parks and other tourist attractions wanted their share of America’s burgeoning recreational spending.
This was also a time for rapidly expanding health care. Advancements in medicine, in part the result of medical technology developed for World War II, helped make health care relatively more affordable. Cost reductions and the emergence of health insurance—a service industry—inspired growth in health care—another service industry.
Let us also not forget that this was the time when American families discovered just how complex the federal tax code was. A tax accountant, while not cheap, gradually became a necessity for many.
All these are examples of services that grew rapidly in importance—and presented outstanding profit opportunities for entrepreneurs. To hire qualified staff, they needed college graduates; meaning another service category saw rapid growth.
In 1970, services for the first time accounted for more than half of American consumer spending. From there, though, the growth in the services share of household outlays slowly tapered off (phase 3 in Figure 1). There are several reasons for this, one being the saturation of consumer needs; some economists would say that the markets matured and reached a state of ‘establishment.’
Another reason why the growth trend in services spending began tapering off is the rising cost of home ownership. Mortgages were expensive in the 1970s and 1980s, with interest rates to match and exceed double-digit inflation. At the same time, homes became increasingly elaborate; living in a normal, middle-class neighborhood had become a costlier affair—relatively speaking—than it had been a generation earlier.
On top of higher-standard, costlier homes, Americans began making an increasingly painful acquaintance: the property tax. While not new to anyone, the property tax emerged in the 1980s as an alternative source of revenue for governments that met fierce resistance to higher income taxes. The property tax is often concealed to homeowners as part of their mortgage payments. It is also decided on in a much less conspicuous way than income taxes: calculations of what a homeowner owes are based on millings, per-milling rates, and property assessments. Unlike the income tax, which is an apparent percentage that anyone can look up, the property tax requires detailed information beyond what most homeowners care to search for.
Rising property taxes ate away at some of the growing purchasing power that Americans in general experienced in the 1980s and 1990s. In a manner of speaking, this increased the fixed cost of living for millions of families. With these rising costs demanding a larger share of household budgets, the share of household budgets that went to ‘essentials’ was no longer in decline. It seemed to keep up with whatever increases households saw in their disposable income.
Over time, this increase in the ‘fixed’ cost of living would play a role in the slowdown in economic growth. Were it not for the growth-generating tax reforms in the 1980s and the first so-called tech revolution in the 1990s, this slowdown would have happened 20 years earlier than it actually did.
With the downshift in long-term GDP growth from more than 3% to 2-2.5% in good times, wages and salaries grew more modestly as well. Overall, our standard of living has made no significant leaps in recent decades; we have not seen anything like the rise in prosperity that we saw in the middle of the last century.
Curiously, this has also led to a stagnation in the share of consumer spending that goes toward services. The growth in services spending from the last century leveled off in the late 1980s, the 1990s, and the 2000s. And then, about a decade ago, something peculiar happened (phase 4 in Figure 1): Consumer spending on so-called recreational goods accelerated rapidly. This increase was nothing new per se, but starting around 2007 the spending by households on this type of goods really took off.
The details of this type of spending appear under the national-accounts system as private consumption expenditures on “video, audio, photographic, and information processing equipment and media”. For simplicity, let us call it ‘electronic platforms.’
Over the 16-year period from 2007 through the second quarter of 2023, American consumers increased their outlays on electronic platforms by an inflation-adjusted 575%. To get an idea of just how much this is, consider that spending on groceries increased by 32% (again adjusted for inflation). The consumption of gasoline and what is referred to as ‘other energy goods increased by less than 1%.
The contrast between spending on electronic platforms and gasoline is a striking one that we shall return to in just a second. First, let us note that the rise in spending on recreational goods does not come unaccompanied. Spending on
- Telephones and related communication equipment increased by 2,800%;
- Internet access increased by 285%;
- Telecommunication services grew by 87%.
In the first quarter of 2007, American consumers spent $2.6 billion on telephones and “related communication equipment”; in the second quarter of 2023, that amount had increased to $75.4 billion. Spending on internet access grew from $26 billion to $100 billion, while the market for telecommunications services to households expanded from $116 billion to $217 billion.
All these numbers are adjusted for inflation.
By contrast, here are the increases in spending on
- New motor vehicles, 25.6%;
- Gasoline and other energy goods, 0.9%; and
- Motor vehicle maintenance and repair, -5.1%.
The virtual standstill in gasoline consumption is partly explainable by the continuously improving fuel economy in passenger vehicles, but it is also the result of several years when the number of miles Americans traveled did not increase. From 2007 to 2015, American motorists drove virtually the same amount of miles per year: 3 trillion.
After a small increase in the Trump years, the total number of miles capped out at approximately 3.26 trillion miles per year. In other words, in the 15 years from 2007 through 2022—the last year for which the U.S. Department of Energy has published data—motor vehicle travel in America expanded by less than 10%. Contrast this to the 15-year period from 1982 to 1997, when we expanded road travel in our cars and trucks from 1.5 trillion to 2.5 trillion yearly miles. That is an increase by 67%.
Since both the population and the number of people working and commuting have grown since 2007, the flattening-out of the number of miles we drive means that the average American is driving less.
We spend less time on the road. But what do we do with that time?
What was the big invention that correlates in time with this shift? Social media. If we include both interactive products, like Facebook, Twitter/X, and Gab, and traditional one-way communications products such as Hulu, Youtube, and Netflix, we get a good picture of where we spend the time no longer wasted on the road.
We do not travel as much to see friends and family as we used to do. We talk to them over the internet instead.
This is, of course, a simplified interpretation of the data. There are other aspects to the numbers. With more sophisticated internet services and more capable computers, we have been expanding our opportunities to work from home for many years now. The term ‘telecommute’ became a staple of job advertising long before the 2020 pandemic. It started appearing in job ads almost contemporaneously with the evolution of the internet already in the late 1990s.
Furthermore, online shopping, banking, and even health consultation have eliminated more reasons for people to drive—and increased demand for electronic platforms of all kinds.
With all this taken into account, it is nevertheless a fact that the American consumer today is a different animal from who his parents and grandparents were in the last century. The numbers on U.S. private consumption reveal a tectonic lifestyle shift, one that is likely going to continue in coming years.
