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.
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