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Some analysts claim that retail sales have been relatively weak because consumers have shifted from purchasing “things” to purchasing “experiences.” But a closer look at data suggests some interesting patterns in consumer spending.
Shoppers are choosing experiences over stuff, and that’s bad news for retailers.1
Headlines such as this can be worrying for brick-and-mortar retailers, already weighed down by the rising share of e-commerce in total retail sales.2 Often, a shift to “experiences,” such as travel, entertainment, and dining out, is cited as a reason for the rise in store-closings, bankruptcy, and demand for shorter leases in the retail sector.3 Such a shift may also appear to be an explanation for what seems to be a puzzling phenomenon in the economy: Despite strong jobs growth, many retailers believe that their sales are weaker than expected. And, often, the usual suspects—Millennials—are trotted out to explain these shifts. But are consumers indeed rushing to experience? And if so, are Millennials driving this trend?
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To find out more about consumers’ spending habits, we looked at two of the leading measures of consumer spending in the United States: the Survey of Consumer Expenditure (SCE) and the Personal Consumption Expenditure (PCE) series.4 According to the SCE, average consumer expenditure has grown at a healthy pace in recent years (4.7 percent in 2014 and 4.6 percent in 2015), recovering steadily from the downturn of 2008–09. This rules out slowing consumer spending as any cause for retailers’ concerns—consumers are indeed spending. The question then is, what are they buying?
What are consumers spending more on these days? Not housing, as it appears from the data. Total housing—comprising of owned dwelling, rented dwelling, and others in the SCE—has usually accounted for a large share in consumer spending. However, its share in average consumer expenditure has gone down (19.2 percent in 2015) after peaking in 2009 (20.5 percent).5 This decline is likely primarily due to lower mortgage rates since 2009, which has benefitted homeowners and hence, pushed down the share of owned dwelling in average consumer expenditure. And this decline has likely been enough to offset the rise in rental costs, and thereby, the share of rented dwelling in average consumer expenditure. Rental costs have gone up as rents have risen faster than house payments and because of declining homeownership; according to the US Census Bureau, the share of households in owner-occupied housing fell from a peak of 69.0 percent in 2004 to 63.4 percent in 2016.6
Many consumers are also not spending as much as they used to, relative to total spending, on groceries. The share of food at home—a proxy for groceries—in average consumer expenditure has fallen to 7.2 percent in 2015 from 8.8 percent in 1990.7 A key reason for the declining share of groceries in average consumer spending is likely to be the lower food inflation of late—itself a likely consequence of intense competition among grocers—compared to overall inflation. For example, prices of food and beverages purchased for off-premise consumption (again a proxy for groceries) grew on average by 1.4 percent over 2010–16, lower than the total PCE inflation (1.5 percent).8
Consumers don’t seem to be spending more on clothes and automobiles either. The share of apparel and services in average expenditure fell to 3.3 percent from 5.7 percent over 1990–2015, while that of new cars and trucks also fell, albeit with fluctuations, during this period (figure 1).
Are consumers then spending more on eating out or entertainment, both of which can be categorized as experience? According to the SCE, the share of food away from home—a proxy for eating out—in average consumer expenditure has been a bit cyclical. Despite going up a bit in recent years, the share is still below the average 5.5 percent for the previous decade. The trend is similar for entertainment (figure 2). In short, consumers don’t appear to be rushing into experience any more than they used to earlier.
Interestingly, the SCE data indicate another surprise: Younger cohorts are often no different than older ones (or all consumers) in their spending on experience. For example, Millennial consumers—those between 25 and 34 years of age—are not spending more on food away from home and entertainment relative to total expenditure (figure 3). This pattern is no different than the ones for the 35–44 years cohort and the 45–54 years cohort.
The PCE data do not reveal anything different either. The share of purchased meals and beverages (eating and drinking out) in total PCE has gone up in recent years, but is still low compared to the early 1990s. Shares of foreign travel and recreation services have been fairly static, while spending on travel accommodation has increased marginally—to 1.0 percent in 2016 from 0.7 percent in 1990 (figure 4). We do find a slight increase in the share of goods such as smartphones and tablets, part of which may fall in the experience category. For example, the share of video, audio, photographic, and information processing equipment in PCE increased to 1.8 percent from 1.5 percent during 1990–2016. However, all the above increases in shares are likely too small to account for the fall in shares of other products and services.
A closer look at the data shows that it’s not a sharp rise in spending on experience, but costs related to health care and insurance and pensions (figure 5) that are likely driving consumers away from traditionally strong retail segments such as clothing and motor vehicles. The share of out-of-pocket health spending in average consumer expenditure, according to the SCE, went up to 7.8 percent in 2015 from 5.2 percent in 1990. And it is not only older cohorts that are spending more on health care, but young consumers as well. For example, the share of health care in average consumer expenditure went up to 5.3 percent from 3.5 percent between 1990 and 2015 for consumers in the age group of 25–34 years; for 35–44-year-olds, the corresponding share rose to 5.9 percent from 4.0 percent over this period.
Data from PCE confirm the trend of higher health-care-related spending within consumer expenditure. For example, the share of health care in total PCE rose to 21.6 percent in 2016 from 15.3 percent in 1990. Note that the higher share of health care in PCE as compared to average consumer expenditure from SCE is due to the inclusion of expenditure other than out-of-pocket spending.
The rise in the share of expenditure going to insurance and pensions, on the other hand, seems to be at least somewhat related to the aging of the population and, perhaps, the impact of the financial crisis in 2008–2009 on many households’ 401K balances. These out-of-pocket payments (for retirement) rose from about 9.1 percent of spending in 1990 to 11.2 percent in 2005, where they have largely remained. Payments by consumers in the 55–64 years category continued to rise after the Great Recession and now stand at about 13.0 percent of total spending. Consumers close to retirement are saving more, and spending less on today’s wants—whether on experiences or on things.9
While it is clear that the growth of some traditional segments of consumer spending such as clothing, groceries, and automobiles has lagged total consumer spending, this trend does not appear to be the result of a large shift to experience. Instead, health care, and insurance and pensions are eating up more of consumers’ budgets. Retailers should try to understand the pressures on their customers and understand that there is no mysterious shift in consumer desires driving changes in spending patterns. It’s just the age-old need to pay for health care and finance a comfortable retirement.