Spending changes massively

Background

Through the pandemic, spending has surged.  Amidst concern of a recession, spending has continued growing.  However, it’s skyrocketed in a few categories.  What are people buying as spending changes massively?  This analysis looks at the categories that account for most of the increase in spending from second quarter of last year to second quarter of this year.  The chart below is color coded. Blue bars are “essential” expenses and orange are discretionary.

Findings 

  • Overall:  A big zero (what??):   Comparing the second quarter of this year to the second quarter of last year, spending is up 8% — but inflation, measured by the Consumer Price Index, is up even more, 9%.  That means that we are spending more…but net, getting less.
  • Huge jump in travel:  Air transport and accommodations (hotels) are both up more than 2/3.  For air fare this is half due to higher ticket costs, and half due to more travel as pent-up pandemic demand explodes. 
  • Gas is very expensive:  Anyone who’s driven in the past year knows what’s happened here as gas prices surged.  On average we’re spending 50% more on gas than last year.
  • Utilities jumped:  This is primarily the cost of electricity.  Throw in a war in Ukraine, higher oil and natural gas prices, and the story isn’t that we’re using more energy.  We’re just paying more for it.
  • Other essentials got more expensive too:  Grocery inflation was 12% as supply chain issues drove up price.  Housing was up 6% as the market boomed.  And health care…is more expensive every year.

Implications

Spending is only keeping up with inflation.  As consumption flattens and recession looms, what can we expect from consumers?

Historically, in a recession consumers focus on essentials – more on groceries, less on eating out; continued spending on health care, reduced spending on luxuries and on home furnishings.  Oddly, travel spending usually holds up.

Given that every recession has a different foundation (real estate, tech bubble, gas crisis, etc.), consumer behavior isn’t consistent.  What we do know is that it’s important for consumers to be sensible about their spending and saving which so far isn’t happening.  The politicians don’t want spending to go down, but the best call right now for many families will be to step back from excess and to focus on increasing their savings, which they haven’t done yet.

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The small print

The spending data is from the Bureau of Economic Analysis.  The inflation data is the Consumer Price Index from the Bureau of Labor Statistics.   And it’s only fair to point out that by the traditional measure of recession, two quarters of declining Gross Domestic Product, that we’re already in a recession.

Savings continues to drop…who cares?

Background

This blog has tracked the huge jump and dramatic drop in the personal savings rate as the pandemic unfolded.  The most recent government data shows that the savings rate continues to drop, to its lowest in over 10 years.  Why?  What does this portend for households’ financial health?

Findings 

  • The personal savings rate is at its lowest since the Great Recession:   The quarterly personal savings rate, what people make minus what they spend, was 5.2%.  The last time it was this low was in 2009 on the heels of our last recession.
  • The long-term savings trend continues to be downward.  Previous analyses showed that since Boomers reached the workforce, savings has been on a downward slide.
  • The last big stimulus was in 2021 Q1.  For a year the government pumped money into the economy via households’ pocketbooks.  That’s now a distant memory.
  • Inflation caught up with consumers:  In the 12 months ending in June 2022, the inflation rate of 9.1% exceeded the growth of household income of 3.5%.  Buying the same amount of “stuff” costs more today than a year ago.

Implications

During the pandemic, households took their cue from the government and spent – a lot!  But as income stops growing inflation erodes purchasing power, our spending splurge can’t continue.  Americans have shown little ability to save money and it looks like we’ll get caught out again.  While this may be short-term good news for politicians who want to keep the economy out of recession, it’s bad news for households who seem unable to build a nest egg.  This sets us up for a bad ending.  Now is the time to get clients to practice better long-term savings hygiene.

Following posts will examine how spending has changed over the past two years.

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The small print

The savings data is from the Bureau of Economic Analysis.  The inflation data is the Consumer Price Index from the Bureau of Labor Statistics.   And it’s only fair to point out that by the traditional measure of recession, two quarters of declining Gross Domestic Product, that we’re already in a recession.

Savings rate tanking again?

Background

Readers of this blog know that the long term savings rate plummeted as Boomers entered the workforce.  This presents a huge risk to many households’ ability to retire comfortably.  But with the pandemic came a gusher of money into the pockets of Americans.  Initially, this led to a big jump in the savings rate.  Have Americans continued to save, or is the savings rate tanking again?

Findings 

  • Regrettably…yes:   The savings rates has dropped back down to 8%, a pre-pandemic rate.  In January of 2022 it dropped even further, to 6.4%.
  • Spending is the highest…ever:  In the fourth quarter of 2021, American households spent $4.1 trillion.  This is a new record.  It’s driven most by jumps in spending on cars, food, housing, and health care.
  • The pandemic “slowdown” lasted only one quarter:  The popular perception is that for much of the past two years we’ve been holding off on spending.  The reality is that once the first stimulus check hit our pocketbooks, we immediately did what the government wanted us to do.  Spend.  

Implications

There’s plenty of analysis showing that a 7% savings rate isn’t high enough to provide adequate funding for many households’ retirement goals.  The one small bright spot in this data is that with income also higher than ever, the absolute dollar amount of savings is larger than before the pandemic.  It’s not that much more, though.  As a result, the issue is that once again our culture of consumption means that we are giving up future comfort in return for current retail therapy.

Certainly every client has a different situation.  That said, it’s quite likely that most banking and brokerage clients are not saving as much as they should and would benefit from any counsel that drives them in this direction.

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The small print

This data is from the Bureau of Economic Analysis.  I’ve used actuals, not inflation adjusted numbers.   This doesn’t change any conclusion – up until the last couple months inflation has been quite low. 

6 reasons your spending is the highest ever

Background

The pandemic didn’t slow spending – it jacked it up massively!  After the first quarter of lockdown in April-June 2020, personal consumption spending has consistently been climbing.  It is now at the highest level…ever.  Certainly, the federal stimulus has been a big factor.  Even airlines and hotels are rebounding to near historic levels; but if you look at the data you’ll learn the 6 reasons your spending is the highest ever.

The main comparison here is the fourth quarter of 2021 to the fourth quarter of 2019.  I’ve also shown the nadir of spending – the second quarter of 2020 – as a comparison point.

Findings 

  • #1 — On the road again:   Car purchases and gasoline combined represent a $243 billion annualized growth in spending vs. 2019.   Two big factors emerge.  One is spending on gas; while miles driven last year only rebounded to be on par with 2019, gas prices are up 30%.  And while new cars are hard to come by, used car sales were up over $100 billion!
  • #2 —  Eating:   Yes, we spent more on groceries when the lockdown started – up 12% in 2020 Q2 – but this kept rising to a 21% jump by end of 2021.  On top of that, we not only returned to dining out with a vengeance – we’re actually spending more now than before the pandemic!   In total we’re spending almost $300 billion more a year on what we literally consume.  Note groceries includes alcohol – which saw spending grow at the same rate as food products.
  • #3 – Housing:  House prices and rental prices are climbing.  On top of that, utilities are more expensive with electricity and natural gas both up 11%.
  • #4 – Health care:  Fear of COVID stopped many of us from going to the doctor in 2020 Q2.  This was the biggest spending drop, at over $500 billion.  But we’re back to normal, even beyond, as we are now spending $126 billion more than pre-pandemic  medical care.  With the cost of care rising only 2.5%/year, this suggests we are in fact getting more care.
  • #5 – Home furnishings:  Is there anyone who didn’t have a lockdown project to improve their home?  In addition to home furnishings, this category also includes appliances, dishware, and tools, with every category up about 30%. 
  • #6 – Clothing:  Sure, we all stopped shopping at the start of the pandemic.  Besides, who needs nice pants for a Zoom call?  Yet…we’re up $80 billion/20% vs. pre-pandemic levels.

Implications

Obviously, at a macroeconomic level, we face a big question regarding if the country can sustain the red hot economy of spending.  At an individual level, we each face the question of if we are over spending when we may want to save and prepare for the inevitable recession.  Taking on higher mortgages and car payments, not to mention credit card bills, present real financial risks for many Americans.  The savings rate has dropped dramatically – a subject for the next post.

The data above suggests other problems that are evolving.  Big spending on food means bigger waistlines.  Half of Americans admit to gaining weight in the first year of the pandemic; does anyone think that number isn’t really a lot higher?  Combined with the big increase in demand for help from psychologists, it appears we are facing a growing health crisis down the road.  Many medical specialties likely will experience an ongoing surge in demand.

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The small print

This data is from the Bureau of Economic Analysis.  They annualize their quarterly data so I’ve reported the annualized number  in the category chart and analysis.  The total spend data is for each quarter, not annualized.  Housing costs include a BEA calculation that imputes the rental equivalent for owned housing so it’s not exactly what you spend (e.g. mortgage, insurance) but is a proxy for that.

Balancing checkbooks: quaint anachronism?

Image courtesy of Pixabay

Background

In the past, the monthly reconciliation of your checkbook register with the bank statement was a standard ritual.  Up until the 1960’s it was common for public schools to teach how to do this.  However, this is certainly no longer the case.  Does anyone balance their checkbook anymore…and does it even matter?

Findings 

  • Nope:   79% of American adults report they never or rarely balance their checkbook.  Based on my own qualitative interviews, many of the other 21% aren’t being truthful.  Just ask your friends/kids/partner/next door Millennials.  Balancing is rare.
  • But we check our balances all the time:  One study reports that one in three checking account holders check their balance…daily!  Another one third check it weekly.  If you’re not balancing your checkbook, at least you’re finding out if you’re out of money.
  • Yet we still mess up and overdraft:  1/5 of Americans report paying an overdraft fee in the past year.  90% of those said they overdrafted without realizing it.
  • And have no idea what we spend:  Only 1/3 of Americans claim to have an idea of what they spent in the past month.  This is much lower for younger adults, 27% for Millennials and 23% for Gen Z.

Implications

OK…does it matter?  If you keep track of your balance and there probably aren’t any big or weird bank errors or fraud in your account, so what?  If you’re using a debit card, it’s hard to spend more than you have!

Yet I’d argue there are two good reasons to balance your checking account (at the risk of sounding too old school).  The first, smaller one, is to catch any errors or fraud in your account.  Do you really trust your bank to be perfect? 

The larger reason, though, is to understand your spending.  If you’re not reviewing how you spend, you can’t manage it.  Consider that the evolution of spending puts us farther and farther away from the reality of money.   WE’ve moved from paying with cash, to writing checks, to swiping a debit/credit card, to now waving your phone at a terminal. Spending doesn’t feel like using real money.  A monthly review of what you spent increases your knowledge of it and will probably make you think twice about certain expenditures. We’ve seen that for the past 40 years the savings rate has been on a downward slide – is part of this because we don’t even pay attention to expenditures?

There’s a need for basic financial education of Americans before they turn 18.  Parents seem unable to do it (how can you teach it if you don’t know it yourself?).  And it is certainly NOT the one-day quick hit “finance day” that seems popular with many bank/brokerage funded education programs.  It has to be ongoing education, as a partnership between schools – choosing their curriculum – and financial services firms that are willing to dedicate the resources to helping it work long term.

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Record spending is cocooning

Background

Consumer spending in the United States set another record high in July of 2021.  We already saw in June that this was happening as a follow-on to recent stimulus payments.  It appears that the massive government stimulus is driving the desired (by government) growth in consumer spending.  But where is this spending coming from?  Is it all about summer vacations finally coming back, or is it something else?  This analysis compares spending in July 2021 with a baseline of July 2019 – the last “normal” summer when spending wasn’t influenced by COVID or stimulus payments.  Note that the BEA data is reported as annualized data, so the numbers here are the annualized July data.

Findings 

  • Eat up:   Groceries (including alcohol) was the biggest increase, and the fourth biggest jump was in eating out.  They’re both double-digit increases and combined we’re spending almost $300 billion a year more on what we eat.   A Harris pollearlier this year found that 40% of adults reported an undesired weight gain in the past year with an average jump of 29 pounds!
  • Way more on our homes:  There are two drivers here.  One is home furnishings, up $97 billion.  The other is what we pay for our homes – mortgages and rent – which is up $174 billion or 8%.  This is driven both by rising average home purchase prices, with the median sale price up 16% in the past two years, and rental rates, which rebounded strongly in 2021 and are now at their highest level ever.  
  • Splurging on new cars:  Vs. two years ago, spending is up 28% or $81 billion.
  • Getting back to health?  Spending on health care – doctors, hospitals, etc. – is back above its pre-pandemic levels. Spending on pharmaceuticals is up 10% — both prescription and over-the-counter drugs.
  • Clothing is a thing again:  Despite what seemed like a limited need to “dress up” when we were mostly at home, we’re now building up our wardrobes to the tune of $75 billion more a year.
  • It’s not really going to vacations:  Note that categories like hotels and air travel didn’t even make the list of big increases.  In fact, they are both still below pre-pandemic levels, though they’ve recovered dramatically.  We don’t know though how much of this spending is business vs. personal use.

Implications

Giving people money to spend…results in spending.  Perhaps not a shocking conclusion.  But this spending is way more pronounced this year.  Much of the 2020 stimulus payments went straight to savings as many people, especially those who were still employed, chose to put the government checks into savings.  Now we’re seeing what appears to be a COVID rebound in spending.

But it’s not as much about summer vacations as it is about summer “stay-cations”.  Record spending is cocooning. We’re putting most of that money into both eating and housing.  A lot of money.  So not only is there a housing bubble, there’s an eating bubble.  As stimulus payments taper, can this continue?  

As discussed in the previous post, the decline in the savings rate may put Americans’ goal of a comfortable retirement at risk.  Government largess – especially to those who may have less need of it – encourages a spending mentality.  While this is the government’s goal, to juice the economy in the near term, it doesn’t encourage long-term financial success.  Financial advisors and financial services firms have an opportunity to reinforce with their clients the long-term approach of saving and investing.  What better time than when they have extra money in their pockets?

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The small print

This data comes from the monthly Bureau of Economic Analysis release.  They do seasonal adjustments and then annualize the data so what is reported here is essentially July times twelve.  I’ve used the numbers that are not adjusted for inflation.  Given the very low inflation rate and the big trends we’re seeing, this won’t impact any of the conclusions.   

Spending like it’s 2019

Background

As we entered the pandemic, people stopped spending and sat at home.  Now that the country has largely reopened and people are getting out, what has this meant for their finances?  We have already seen indications of increased spending.  Are people really spending like it’s 2019 again?

Findings 

  • Spending is back:   Personal consumption is at its highest level…ever.  The BEA reports that in June spending was over $1.3 trillion – the highest month on record.
  • Income is higher than its pre-pandemic level, most impacted by stimulus payments:  March 2021 was the biggest distribution; about $400 billion in extra money flowed to individuals.  A smaller but notable impact was that workers’ wages and salaries were up 4% vs. February of 2020.  With unemployment dropping but still above pre-pandemic levels, something else is happening with worker pay (topic for a different post).
  • The savings rate has regressed to about where it was pre-COVID:  As stimulus fades and spending grows, the June savings rate was 9.4%.  This is well down from the “cocooning” days of 2020.  It’s only one percentage point higher than in February of 2020.

Implications

People aren’t spending like it’s 2019 – they’re spending more!  Perhaps this is just making up for what they didn’t do in 2020 – buying cars, taking vacations.  However, it appears that the panic saving of early 2020 is a distant memory. Experience with past recessions shows that Americans quickly forget the pain of financial pressure and jump back on the spending bandwagon.  Extensive government stimulus appears to be doing what it was intended to do – drive spending to juice the economy.

The challenge is that Americans are returning to a savings rate that is unlikely to deliver the retirement that they desire.  This may be a moment for financial advice that counsels moderation in the spending, while recognizing you can’t shut down the splurge.  Of course, the numbers in this discussion are averages.  This– hides big differences between struggling households that are underemployed, and white collar households that stayed employed and got extra money dropped in their wallets.

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The small print

This data is pretty straightforward and consistent, coming from the monthly Bureau of Economic Analysis release.  Disposable income includes a range of categories that I didn’t discuss but also didn’t change much – income from assets (dividends, interest), rental income, business income.  Consumption is a big category and will be evaluated more in the next post.   

Post-pandemic spending splurge?

Background

The March spending data show that Americans are big spenders again.  In March, American households spent more money than…ever.  The monthly spend on personal consumption, measured by the BEA, was $1.28 trillion, which surpassed the February 2020 pre-pandemic peak of $1.24 trillion. This continues a trend we’ve seen of recovery in consumer spending throughout the pandemic.  No doubt the arrival of the next round of stimulus checks encouraged this.  What purchases are driving the post-pandemic spending splurge?

Findings 

  • Food is the new entertainment:   Grocery spending jumped at the beginning of the pandemic and is still 16% higher than just before we locked down.  This was expected given everyone staying home from restaurants.  Yet in March restaurant spending was almost back to pre-pandemic levels.  It seems that we are continuing to stock our pantries while we enjoy dining out again.
  • Entertainment still suffering:  We have not yet flocked back to theaters, sporting events, Disneyland, museums, and other live experiences.  This spend is still down by half compared to normal. 
  • Radar love?  New vehicle sales are up 39% (!) vs. year ago.  Pent up demand?  Time to splurge?  Note that the lions’ share of these vehicles is “light trucks”, a category that includes SUVs.  Apparently, we’re not all buying Teslas.
  • Home improvement continues:  Spending on home furnishings and tools continues to run well above historical rates. The computer/software category is also still well above normal.  We are continuing to improve our homes, and, it seems, our home offices.
  • Travel hasn’t recovered all the way:  Hotels/accommodations and air travel are still down by half, though that’s not as bad as when they were almost totally shut down.

Implications

The big questions around this post-pandemic spending splurge are “what will stick?” and “what else will increase?”  We’ve seen a dramatic jump in the savings rate as people stayed home and stopped spending on many items.  Maybe it’s just people spending their stimulus checks.  But how long before we all start traveling again and going to football games?  The risk is that spending climbs to eat up the recent savings and possibly even cut the savings rate below its low historical level.  Yes, we have a psychological need to “get back to normal” and live life outside our property boundaries.  But this is also a time for advisors to help their clients avoid swinging too far in the opposite direction.

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The small print

The BEA data is not inflation adjusted, not that this would impact the findings during a low-inflation period.  “Haircuts” is a payments to others for personal care so includes not only the stylists, but also things like getting your nails done. Entertainment as a category includes many things – gyms, sporting events, theaters, museums, clubs.  I’ve obviously excluded many categories of spending, choosing to focus on the ones with the biggest change today vs. year ago (except dining out, which I included because it’s amazing how it’s back to pre-pandemic levels).

Modern tech ate your savings

Background

Our modern society has modern expenses that did not exist previously.  Cell phones, Netflix, and Internet access all extract money from our wallets.   As many households try to save for retirement and other purchases, is it true that modern tech ate your savings?

Findings 

  • New tech costs the average household over $4,000/year:   Computers, software, and Internet access make up the lion’s share of this amount.  Cable TV and streaming media combined average about $1100/year.
  • Your mileage will vary – you may spend more than this:  These numbers are averages, which include in the calculation households that don’t pay for these services. Also, while cell phone usage and Internet subscription rates are in the 80%- 90% range, we know your household may not be average.  If you just added Disney+ as your fifth streaming service…or have three kids with phones…you’re probably paying a lot more than the average. 
  •  Increased tech spend during the pandemic:  Computers and streaming media both jumped substantially in 2020.  Home offices and quarantine entertainment meant more money spent on these.  

Implications

Would you go back to a flip phone to save money?  The challenge with new tech is that we are wedded to it.  There may though still be room to coach financial services clients to moderate their behavior.  With everything moving to a subscription model, it’s easy to forget you are locked in to a lot of expense.  An annual review of recurring expenses may be a good start at finding more money to save.

The small print

The numbers for Modern Tech Ate Your Savings came from the BEA.  The spending increases are not adjusted for inflation, though inflation was very low during the last year so this doesn’t change the conclusions.  I excluded from “new tech” anything that was more traditional.  This included televisions, audio equipment, telephones, and even digital downloads.  With downloads, I assumed it just replaced old-school VHS and DVD purchases so excluded it from the “new” category.   

COVID spending telegraphs evolving fears

Background

We’ve already seen obvious spending changes during COVID – like more sin purchases and home office expenses.   Looking at full year 2020 data also shows that COVID spending telegraphs evolving fears.  A year into the pandemic, spending behavior has settled into a long-run trend.  What does this tell us about what we fear?  This analysis looks at how spending has changed from December 2019.  Comparisons are to the nadir of spending in April 2020, and to the most recent data from December 2020.

Findings 

  • Fear of dying from something besides COVID:   Spending on health care initially tanked, down by a third, as people were unwilling or unable to get medical care.  But by December health spending was almost back to normal.  Presumably we all heard the messages that we could have all kinds of health problems if we neglect our care.  In addition, we were bombarded by messages from health care providers outlining all their safety measures.
  • Fear of dying without providing for others:  Spending on life insurance was up 7% year over year, as firms saw a double digit percent increase in policies written,  reversing a two-decade decline.  
  • Fear of dentists:   Spending on dental care plummeted by 2/3 in April, when your dentist probably wasn’t even open.  By year end, when you might expect above normal business as people finally went back to their dentist, spending was sill 15% below a year ago.  This analysis will avoid psychological analysis regarding if people use COVID as an excuse to avoid one of their least favorite things.
  • Fear of flying – Commercial airline spending is still down by half vs. a year ago.  Despite massive efforts by the industry to encourage travelers to return, both the airline and hotel industry remain hugely depressed.
  • Fear of cooking – Fast food restaurant meals are almost back to pre-pandemic spending.

Implications

While the parallel increase in both health care spending and fast food spending may seem counterproductive, it’s not unexpected.  We are trying to return to life as normal – or as normal as we feel safe living it.  That means seeing your doctor again.  It also means being tired of cooking (who really wanted to prepare dinner every night?).

Ultimately, this data suggests what previous posts have pointed to:  we are defining a new version of “safety”.  We apparently see as low-risk (for virus transmission) things like visiting doctors, and McDonalds, but we don’t believe that travel is safe.  The panic buying of life insurance may be a brief jump.  However, it may also suggest to financial advisors that this is a good time to have an insurance discussion while people are more open than ever to the idea. Ultimately, COVID spending telegraphs evolving fears.

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The small print

The spending data comes from the BEA.  The spending increases are not adjusted for inflation, though inflation was very low during the last year so this doesn’t change the conclusions.  “Fast food” is what the BEA defines as “limited service” restaurants, where you don’t sit down and get table service.