Category: How Americans spend

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.

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.   

Background

If you have a bank account with a large institution, their website probably has a section intended to help you track spending and design a plan to save for retirement.  At the same time, the history of financial services is 100 years of breakthrough banking innovation that makes it much easier to borrow, and to spend, money.  People have responded by…borrowing and spending more money.  Previous posts looked at the increases in household spending which have been dramatic.  This article looks at how 100 years of breakthrough banking innovation has made it easy to borrow and spend, and the impact on household debt.

Findings

• 100 years of encouraging borrowing:   In 1916 GMAC finance created the auto loan.  Since then we’ve seen federally guaranteed home and student loans, HELOCs, and credit cards being introduced.  In tandem, we’ve seen incentives from government to buy homes.  Think mortgage interest deduction, and Fannie Mae ensuring a market for home loans.  Student loans, also federally guaranteed, have jumped to $1.5 trillion currently owed.  Auto loans and credit cards have become the norm for many households.
• Products that encourage more spending:  Does anyone remember paying for groceries with a check, or even cash?  A series of innovations in purchasing have created great convenience for consumers.  ATMs let you get cash 24/7. Contactless payment lets you wave your phone to pay.  New credit card policies for many issuers and merchants omit the need for signatures.  PayPal is introducing “Pay in 4”, the ability to buy now and pay over 4 months, essentially the modern digital version of buying on credit.
• More spending and higher debt:  The aforementioned posts on this site look at the substantial increase in household spending, particularly on homes, cars, and education.  The chart below shows that household debt has doubled since 2003.  

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Implications

We live in a time of financial double-edged swords.  The convenience of easy payment, and the ability to borrow in so many ways, enables people to do things they might have only dreamed of in the past.  At the same time, this convenience leads to more spending and more borrowing.  The Pandora’s box of cool innovations is open and likely will generate new products as Fintech creativity continues to disrupt the industry.  How do we help the customer manage their finances?

• Serious help – Financial institutions need to be serious about their efforts to reach out and help their customers be intentional about their plan and actions. This means more than a tab on a website, it means talking to customers (live or virtually) and collaborating on how to reach long-term goals.
• Positive innovation – We’ve seen Fintech services that help consumers track how they’re spending and saving.  Uptake and usage have been slow.  There is an opening for something better – but we haven’t seen it yet.
• Finding the moral balance – Let’s face it, if you are a bank that makes money from fees, and from interest on home loans, credit cards, and other household debt, there are pressures to maximize near-term revenue.   On top of this, more sophisticated banks focus on selling you the product you’re most likely to buy next. This isn’t customer focused. The long term approach means not pushing your customers to borrow or spend more, rather take a holistic view.  Noble statements saying you want to help cusstomers succeed are great, but some financial institutions need a cultural reality check.  If customer long term success is important, then approach them with holistic help, not product sales.

The small print

To be purer in the analysis of growing spending and debt, we should also look at rises in income.   If you make a lot more money, maybe more debt isn’t so bad.  If you don’t adjust for inflation, the average household income rose 59% from 2003 to 2019 during a period when debt doubled.  Debt rose faster than income.   This also doesn’t account for the increased income being concentrated in the most affluent households, while debt and spending have grown across most households.

Background

We saw in a previous post that the second largest expenditure for American households is household spending on transportation.  This averages a bit over $9,500 a year, or 16% of the typical household’s budget.  What are the components of this cost, and how is it changing over time?  Are we really a world of Teslas and BMWs? Or, is that a perception based on those who live in the San Francisco Bay Area?  This post will look at how we spend on transportation, and how it’s changed over time.

Findings

• We are actually spending less on transportation today than 20 years ago.  After adjusting for inflation, the average US household actually spent slightly less on transportation in 2017 than in 1997 (though households are also slightly smaller now).
• It’s all about the cars.  Less than 1/10 of the household spending on transportation expense is for public transit. Almost all the spending is for the cars we drive.  The average US household owns two cars.
• New cars actually aren’t getting much more expensive!  There are various analyses and challenges with how to interpret them. The the bottom line is that inflation is the main driver of the cost perception.  In 1997 the average new car cost $20,305; inflation adjusted to 2017 this is equivalent to $30,010 – nearly a 50% increase.  Kelley Blue Book reported the average 2017 new car price as $36,000.
• Buy or hold makes a big difference:  The average age of a car or light truck on the road is over 11 years.  If you are driving an older car, with no loan to pay off, you’re avoiding finance charges, and possibly depreciation from a big purchase.  On the other hand, a new car today will on average cost you over $9,000/year, including over $3,000 in depreciation.   So, yes, if you buy a new BMW it will cost you a lot more than the household average. But if you’re an average American, you’re getting a much cheaper transportation deal.

Implications

In one sense, the implication is the hackneyed, long repeated one. It’s cheaper to keep your old car, than to buy a new one.  But two concerning trends are making this better advice than ever. 

One trend is the move to longer term auto loans.  It used to be that you’d take out a 36-month (3 year) loan.  However, now the salespeople sell you on a lower payment with a longer duration loan so that you can “afford” a nicer new car.  Experian’s analysis indicates that the average new car loan period is now 69 months – almost six years. Consider the case of a prime borrower purchasing a $30,000 car with 20% down and a loan of $24,000 at 4.5%.  The monthly payment is $714 and the interest paid over the life of the loan is $1700.  But if you bite on a fancy $50,000 car, and put down 20%, a 6-year loan will result in a monthly payment of only $634 – less than the cheaper car.  But over the course of the loan you’ll pay 3x as much interest plus the extra $20K for the car, and you’re in for a lot more depreciation.

The other issue is loan quality.  Subprime auto loans have grown to almost 1/5 of the number of loans.  An excellent New York Fed analysis shows that 8% of these are 90-day delinquent, and not surprisingly younger borrowers are the majority of these delinquencies.  Across all borrowers, 7 million are 90-days delinquent, up a million from a year ago.

The bottom line is that if you’re helping your clients manage their money (or managing your own!) you should think long and hard about following the ancient advice, and avoid being upsold to a car you can’t really afford. 

The small print

I used an online inflation rate calculator.  The main source for household transportation expenses was the Bureau of Labor Statistics which conducts the consumer expense survey every year.  Historical car prices were from the Bureau of Economic Analysis.

The “two cars per household” number is based on the US Department of Transportation, Bureau of Transportation statistics.  Unfortunately, their definition of subcategories of registered vehicles has changed over time. Hence, it’s not possible to compare long term other than total registered vehicles.  By today’s definition, out of 272MM registered vehicles in 2017, 13MM are larger trucks (probably commercial) and buses, so the vast majority of vehicles on the road are personal.  For all these reasons, I’ve used the total registered vehicle number to calculate vehicles per HH which in 2017 was 2.05.  The US household numbers I use to calculate vehicles per HH come from the US Census.

Background

The first of these two posts looked at the huge increase in college attendance, at a rapidly increasing price.  While the combination of these two factors has immediate budget implications for Americans, it gets worse. As students and families spend on education, there is also a long-term impact from the trend in student loan debt.  The presidential candidate debates have brought this issue forward as an impediment to households’ financial stability.  How big is the issue, and what does it mean for the average American?

Findings

• Federally funded/guaranteed student loan debt has skyrocketed to $1.5 trillion, up 6x since 2003.  During this period these loans grew from 3% to 11% of household debt.  There’s over another $100B in private student lending on top of that. This analysis keys on the federally funded or guaranteed loans as they are most of the market and detailed analytics on them are readily available.
• Double the cost, double the people:  We saw in the previous post that college doubled in cost (inflation adjusted). At the same time the number of outstanding student loan borrowers has more than doubled from 19MM to 44MM since 2003.  69% of graduating college seniors in 2018 had some form of student loan debt, and among the total population about one in six Americans have student loan debt.
• The average amount owed is $33K:  This is also the average amount for 25-34 year olds, those Millennials who are trying to buy houses and start families.  The median is $18K.
• Grandpa in debt too?:  Almost $300B of the student loans are held by people over the age of 50; $73B is held by people over 62.  There are almost 8 million borrowers age 50+. This is more likely paying for children/grandchildren’s education than the debtor going back to school.

What does this mean for an “average” household?  The monthly payment for those who are making payments averages $393, or close to $5,000 a year.  This number doesn’t include the 10% of accounts currently in default – not paying.   

Implications

The trend in student loan debt is changing the landscape for saving and retiring.  While death and taxes are supposed to be inevitable, apparently education debt is rapidly joining that category.  This is not only affecting students who exit college with loans, it’s affecting parents who are helping fund those educations with cash or by also taking out loans.  Whereas in decades past children struck out on their own after high school and got a job, now they go to school and spend their money and their parents’.

How can the financial services industry better help parents and students?  It should start with rational counsel.  1/3 of parents with children who are in college or who recently graduated college say they’ve postponed retirement because of education expenses.  A sound financial plan probably requires an emotional discussion contrasting parents’ retirement goals with their desire to help their children.  If the parents’ goal is to try to keep working longer (which may not be possible) to help their children, they should get a firm reality check from their advisor.  If they insist, then a careful examination of their financial reality is a must.  As we will discuss in other posts, our short-term approach to spending and finances has found outlets for irrational behavior – and now there is a new one: mortgaging our futures for our children’s.

The small print

The New York Fed quarterly report 2019 Q3 is an excellent source of information on student loans.  The US department of education releases statistics on debt by age, and the private student loan market is sized by MeasureOne.    A more detailed analysis would look at a more granular reality than is possible in this summary, e.g. by type of university, job prospects, etc.

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Background

While the average family spends only about 3% of their budget on education, we hear constantly about the huge education loan debt owed by many Millennials and Xers.  Is there a big increase in school debt, and if so, why?  This first of two posts on this topic covers college attendance and the trend in college spending; part II will look specifically at student loan debt.

Findings

A lot more people are going to college and spending a lot more!  The first half of this equation is attendance.  The chart below shows this.  While a seemingly large 24% of Boomers got a college degree, nearly 40% of Millennials finished college.  This doesn’t even include those who started and didn’t finish college, or went to a two-year school. The combination of those two categories is another 28% of Millennials.

With the increase in demand for college, the prices have been skyrocketing.  While there may be many reasons for an education growing in cost, over the past 30 years the cost of a college education has doubled after adjusting for inflation.  Whatever you may have paid for your degree, it’s more now!

Implications

While the real implications will be discussed after part II of this post, which will look at student loans, it’s clear that we are becoming a nation of college graduates.  Whether it’s parents or students who pay for the education, the rising cost of college means that families are investing a lot of money where they didn’t in the past.  The trend in college spending is rising dramatically! Stay tuned to part two where we’ll cover the 45 MM people in this country who are holding student loans.

The small print

College attendance by generation is from the Pew foundation, who used the Current Population Survey to determine what percent of 25-37 year olds in a generation had finished an undergraduate degree.    There are some nuances to how the CPS defines this – e.g. in some years it was completing four years rather than actually graduating.  The inflation-adjusted cost of college came from an analysis by the College Board.

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Background

The average American household spends 8% of their budget, $4900 a year, on health care. This cost has been rising over time  (see the How Americans Spend post).  However, the average cost hides a world of (financial) pain households are facing.  If you get insurance through your employer (50% of households) you pay less than buying on your own (7%). However, but any household that’s not on Medicare (14%) or Medicaid (21%) may be faced with some very difficult spending or saving choices given the high cost of getting care.  This post explores the reality for working households and digs deeper than the averages to understand different types of consumers.

This analysis won’t begin to look at the why of rising expenses – that’s an entirely different topic.  And because trying to find good data on health spending, and getting clear insurance plan comparisons, is slightly more difficult than inventing perpetual motion, treat the numbers below as a good indication of reality but not the final answer!

Findings

The short story is that many families can’t really afford health care – and financial services firms do them no favors by skirting the issue in their planning tools.

I’ll focus on costs for the stereotypical family of four – two parents and two children. The analysis below excludes their paycheck contributions to Medicare, Medicaid and other governmental programs taxed through employment. The short story is that the middle class can’t afford medical care!

• A family getting insurance through an employer probably is spending north of $10,000 per year, because:
  • The average portion of the premium they share is $6,000.
  • Their deductible, the amount they must spend before insurance kicks in, averages $3,500.
  • On top of this, plans have an out-of-pocket maximum capping the insureds’ annual spending.  If you’re a typical family with kids breaking arms and getting sick, you’re likely to exceed your deductible and then your out of pocket expenses can be thousands more.

• If the family is buying insurance on their own, they’re looking at $25,000 or more a year.  This assumes they are above the level of subsidy through the governmental exchanges, which is $103,000 a year – about 30% of US households.   No average is available, but we know that the average employer plan premium is almost $21,000. Premiums in the California insurance exchange are $15,000/year for a basic bronze Kaiser HMO plan and $25,000 for a Blue Shield Silver PPO plan.  That means that this family is likely paying in the area of $20,000+ for insurance, plus the deductible and copays. Hence, $25K/year may even be a low estimate.

If your income is below $103,000 subsidies kick in on a sliding scale but you still spend on care. If your income is at the US household median of $62K/year, the premium alone on the Blue Shield PPO will still run about $8,000/year.  Add onto this deductibles and copays and it gets expensive fast.

• Costs are rising dramatically in inflation adjusted dollars:  Anyone who’s paid for health care in the past 20 years knows this!  Per the chart – employee contributions for premiums have risen 149% while the overall premium cost was up 114%.  Deductibles are harder to quantify but in 2004 only half of employer plan participants had them; now it’s 85%.  

Implications

Financial services companies like to tell middle class consumers they need to save a lot more money for retirement. Unfortunately, they almost never talk to them about their health care situation and the tradeoffs that they face.  If you make $100,000 a year pre-tax, that may equate to $75-80,000 after income tax, and you have to pay for housing, food, clothing and transportation.   Spending $10,000 up to $25,000 or more on insurance and health care means either you forgo saving for retirement, or you go without insurance.  To adequately advise consumers on how to manage their finances, you have to understand their situation with respect to health care and tailor your recommendations, instead of jumping straight in and saying “just max out your 401(k)”.  

Most online financial planning tools offer little or no consideration of the health care cost.  The reality is that in many cases, the middle class can’t afford medical care. As an industry, financial services should be addressing health care costs head on, not skirting the issue like a dodgeball player.

The small print

Most of the excellent data for this post came from the Kaiser Family Foundation report, 2019 Employer health benefits survey which has a host of information on employer-offered health insurance plans.  The inflation adjustment can be found here.  California’s insurance exchange costs came from the Covered California website for 2019 coverage.  As mentioned above, the multitude of data sources, vast variations in insurance coverages, and general complexity of the system makes it very difficult to make perfect comparisons or cost of care calculations.

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Background

In the previous post we looked at American’s spending on housing doubling since the post-WWII era.   From 1950 to 2000, the average home purchase price more than doubled.  Are houses just getting pricier – or are we opting for ever bigger abodes in the era of McMansions? What is the trend in the size of American homes?

Findings

• Modest increase in price per square foot:  Data for the past 30 years shows that adjusting for inflation, the average price per square foot for new homes has increased only 15%, but..
• Houses are getting a lot bigger:  Since 1950, the average square footage of a new single family home has increased 180%, from 938 square feet to 2,631 square feet.
• And fewer people are occupying that home:  The average household size dropped from 3.0 in 1973 to 2.5 today.  That means that the square footage of living space per person in a new home has nearly doubled to 970 square feet since 1973.
• Yet – we are chucking a lot more stuff into storage units, too:  Self-storage rentable space in the U.S. totals 2.5 billion square feet – or more than three times the size of Manhattan.  This industry took off in the 1990’s when we were already building bigger houses.

Implications

You shouldn’t blame our nationwide big housing expense on real estate market inflation (though if you are currently trying to buy or rent in certain pricey locations like San Francisco, that’s certainly a challenge).  The bigger long-term issue is that we’re buying or renting bigger houses, and putting fewer people in them!   Add in our thirst for self-storage and it becomes apparent that we are a consumption society – both the trend in the size of American homes, and the stuff we put in them.  

If a family needs to reduce spending substantially, for example to fund retirement, downsizing homes and reducing buying of “stuff” are obvious targets.  We’ll see in later posts why this is so challenging to accomplish, and ways to potentially help people do it.

The small print

Average new home square footage back to 1973 is from the US Census; earlier data is a 24/7 Wall Street analysis using various US Census and other data.  Average HH size is also from a US Census report.  Price per square footage is from the US Census and I used an online inflation adjustment calculator to normalize this price.  Public storage data is from the Self Storage Association.  

One caveat – I’m comparing the average new home size to the average number of persons in an overall US HH – we don’t know the size of family moving into the new homes so can’t be certain of the average living space trend for the average American; the simplifying assumption is that new home buyers are of average HH size.  Also, looking only at new home data – which is the cleanest data on homes available – excludes of course purchases of existing homes which sometimes are smaller, and sometimes are remodeled into something much bigger.

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