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.
