Consumer Spending Is Out of Control!

A recent Associated Press article started off by saying that Americans have been "rapidly shifting from spendthrifts to savers." The descriptor "spendthrift" jumped out at me from that line -- a word that Merriam-Webster defines as "a person who spends improvidently or wastefully." Have Americans been spendthrifts?

It's a heavy charge, but it's been a common refrain from all over the financial world. The theory seems to be that U.S. consumers got carried away buying big-screen TVs and pricey clothes from Nordstrom (NYSE: JWN  ) . Given the amount of consumer debt that Americans carry today, it seems like a pretty solid theory. It's too bad the data doesn't back it up.

The real tale of American spending
Thankfully for data-hogs like me, the Bureau of Economic Analysis allows you to download all kinds of great numbers that let you put together the pieces for yourself when it comes to issues like consumer spending. For my research, I started with the BEA data on personal consumption expenditures by type of product, and I anchored those numbers to GDP. The annual data for both go all the way back to 1929, so we have a good amount of data to digest.

The first thing that jumps out is the fact that total personal consumption spending as a percentage of GDP in 2007 was above the long-term average, and in fact, it's been that way for a number of years. Furthermore, spending on certain categories such as autos, housing, and recreation have all been above their long-term averages over the past decade. However, other categories that we might expect to be elevated, such as clothing and restaurant dining, have been below their long-term averages.

But here's the thing -- even in the categories where spending has been above average, it's not elevated enough to justify a true profligate spending thesis. But there is one elevated category that we haven't covered yet -- health-care spending. Back in 1929, roughly 2.3% of GDP was spent on medical care. Between 1929 and 2007, an average of 5.7% of GDP was spent on medical care. In 2007 12.2% of GDP was spent on medical care. To put that in numbers, had we spent 5.7% of GDP on health care in 2007, it would have come to $785 billion, but our actual spending came to nearly $1.7 trillion.

From numbers to conclusions
The same numbers can say a lot of different things, and if you're an adept analyst or politician, you can even get the numbers to tell multiple conflicting stories. In the case of the numbers above, a strong argument can be made against the "Americans as spendthrifts" complaint. At the same time, though, thanks to companies like Wal-Mart (NYSE: WMT  ) , inflation-adjusted prices on goods like furniture, food, clothing, and autos have come down over the years, so though we may be spending a similar portion of our GDP, most Americans are amassing more stuff. A proponent of the profligate spending theory might argue that we should have been consuming a relatively similar amount of stuff and saving the rest of our money rather than consuming more.

However, there is one thing from this data that is as incontrovertible as Donald Trump's hair is immovable, and that is that health-care spending is devouring the American consumer's bank account.

Gimme shelter!
At this juncture, I could prattle on about what should be done about health care and how Uncle Sam's half-in, half-out approach to health care is screwing up the system. But you've tuned into the stock market channel, not a political shouting match (of which there are plenty). So, what should investors do with this data?

Coming almost full circle, the answer from the data seems to be the same as the one those wasteful-spending preachers came up with in the first place. Americans may not be spending an outsized portion of GDP on toys and other goodies, but it's still likely to be those areas that get squeezed as the economy continues to convulse.

As a result, investors should be focusing on the types of stocks that sell products that consumers will continue to buy through thick and thin -- companies like Coca-Cola (NYSE: KO  ) , Procter & Gamble (NYSE: PG  ) , and Kraft Foods. At the same time, regardless of what I or anybody else thinks about the health-care situation, unless something drastically changes, it seems unlikely that companies like Johnson & Johnson (NYSE: JNJ  ) and CVS Caremark will see revenue fall off drastically. The flip side to this is that companies like Apple (Nasdaq: AAPL  ) and Disney (NYSE: DIS  ) that depend heavily on consumers' discretionary money will be under pressure as consumers are forced to cut back their budgets where they can.

In the end, consumers may not have been quite as irresponsible as they've been vilified for, but that won't make much of a difference when it comes to the household budget cutbacks that many Americans will have to make.

Further financial Foolishness:

Johnson & Johnson and Kraft Foods are Motley Fool Income Investor selections. Walt Disney, Coca-Cola, and Wal-Mart Stores are Motley Fool Inside Value selections. The Fool owns shares of Procter & Gamble. Apple and Walt Disney are Motley Fool Stock Advisor picks. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. The Fool’s disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants …


Read/Post Comments (7) | Recommend This Article (19)

Comments from our Foolish Readers

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  • Report this Comment On March 09, 2009, at 5:57 PM, Ephemeris wrote:

    Good article. It's true many of us have spent beyond our means. Soaring healthcare costs punish businesses as much as consumers.

    Another dimension is that, in a consumer-driven economy, growth must come from increased income (per consumer), more consumers, or debt. Individual incomes inthe US have stagnated or declined in the past decade, despite consistent growth in productivity. Developing countries' middle classes have grown, but not enough to power consumption significanlty. Their governments have preferred to invest in US debt rather over increasing consumerism at home. And so, we have a decade - more really - of debt driven economic growth. At some point, we run out of money to borrow.

    I agree that smart fools will invest in companies with products that have highly inelastic demand. Nobody is skimping on deoderant or laundry detergent. It will be quite a while before the excess debt is wringed out of the system.

  • Report this Comment On March 09, 2009, at 6:23 PM, Firecracker88 wrote:

    What does your data look like when you consider GNP (not just GDP) data? The size of spending on global products in 1929 was much less. We've had huge trade deficits for years. And, you need to consider the aggregate debt load per consumer. Credit card debt of $9k is a significant portion of a person's annual income. Why buy everyday items with it? Why spend hard-earned income on a bridge loan (what I consider credit cards)?

    An American's wealth should increase over time. However, everyone was spending well beyond their means. When the economy was chugging along, and everyone was doing well, that's when the savings should be highest. Saving money should be easy. Savings protect people during any negative events (national or personal). What a lost opportunity!

    If you look at houses from the 1920s to 1940s, the homes are really small, and they had 1 car garages. Garages weren't full of consumer items. They had little in the way of possessions. And, they put in much higher down payments ~50% or built the homes themselves.

  • Report this Comment On March 09, 2009, at 6:40 PM, mattack2 wrote:

    I buy everything I can with credit cards.

    1) They're more convenient than carrying cash

    2) It's definitely WAY faster than writing a check

    3) It's CHEAPER than cash because I get cash back.

    4) I pay NO interest fees because the credit cards are paid off automatically in full every month.

    I have paid I think *2* late fees ever, and that was obviously after the first month after auto-payment hadn't kicked in properly (at least once, I got the interest payment knocked off, but still paid the late fee since I did consider it partially my fault).

    With credit cards, I have gotten a free PS2, several free games, a couple of $25 Amazon gift certificates.

    I realize the counter-argument is that everyone will pay more (because obviously the "cash back" is coming from the fees paid by the merchant), but for virtually all purchases, my price at purchase is exactly the same for cash or credit. Even for gas, which has separate posted prices, I pay less overall due to the cash back.

  • Report this Comment On March 09, 2009, at 8:00 PM, ricketcaz wrote:

    I would suggest you look also at the consumer debt. I heard a broadcast on NPR about this very topic in relation to the banking crisis. The NPR report suggests that the individual debt versus the GDP is typically between 30% to 50%. However, twice in American history the individual debt versus the GDP approached 100%. The first time was in 1929 the second was in the years 2000 to 2008. The person reporting for NPR said the graph looks like bookend hockey sticks.

  • Report this Comment On March 09, 2009, at 11:10 PM, bellefso wrote:

    Can't medical costs be somewhat misleading? in the 1930's there were not many options for cancer treatment, heart surgery or organ transplants. Cost have risen, but so have Americans demands for care. If people want to save the money on medical care that would be an option, to return to the 1940's level of care. Refuse radiation, transplants etc. Most people would not be willing to do this. So yes, the cost of care has risen, but so have the expectations of the consumers. Higher demands for expensive and labor intensive care can't be expected at Wal-Mart prices.

  • Report this Comment On March 10, 2009, at 11:07 AM, bunkie21 wrote:

    Yes, it's true that there are more treatments now. But, frankly, some of the charges are completely out of control. Does it really cost $1000 for a five minute consultation with a doctor in an emergency room where the sum total of care received is "you should get someone to look at that" as happened to me not that long ago? And that was on top of the emergency room charge.

    It's not uncommon to see bill in the tens or thousands for a one or two-day hospital stay. Break down the charges and the results are truly frightening with over-the-top charges for absolutely everything.

  • Report this Comment On March 10, 2009, at 4:07 PM, cowdrick wrote:

    Are you really this obtuse? The reason Nordstrom has historically done so well in both bull and bear markets is their adherence to quality at very reasonable prices.

    Next time you write such an egg head article, let me know in advance. Nordstrom stock (JWN) was up $1.50 today (over 12% single day). I'll buy against your advise more often than rely on it!

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