US recession changes spending priorities, doesn’t reduce spending

Michael Mandel, former chief economist at Business Week and current editor of Visible Economy, wrote yesterday about US consumer spending trends in a post on his website titled “Where Americans Are Spending More.” The post explains that since the recession began in 2007, personal consumption expenditures have actually increased:

Right there up at the top is America’s love affair with mobile devices, where spending has soared almost 17% since the recession started. Also supporting my thesis of a communications boom-spending on wired, wireless, and cable services have risen by 5%.

In addition, Americans still care about their pets, their children, their hair, and their guns.

Mandel’s post has a couple charts that show the actual numbers and percentage increases in spending as reported by the Bureau of Economic Analysis, so I highly recommend checking out the original article. In contrast to the areas of growth, it is interesting to note what segments of the market have experienced decreases:

Americans are spending a little bit less on clothing and hotels; a lot less on foreign travel, video and audio equipment (think televisions), and furniture. The big drop, though, has come in motor vehicles and associated goods and services, like gasoline.

During this recession, it’s not that consumers have stopped buying, it’s that they have stopped buying large, conspicuous, luxury goods, and have instead bought smaller, less flashy items. As a nation, we’re not really cutting back, we’re just giving the outward impression we are.

From a simple living perspective, I have mixed feelings about this report. I’m encouraged that the personal consumption increases seem to be on things that bring people together — communication, food, and caring for the people you love (child care, education, health care). However, it’s still an increase in spending. The media speaks incessantly about American society tightening their belts, but that is not really the case. Instead, it appears our consumer priorities have merely changed to smaller, less obvious purchases.

23 Comments for “US recession changes spending priorities, doesn’t reduce spending”

  1. posted by DJ on

    I wonder if people feel that the media devices have a broader use than other items they might purchase and are therefore more value for the money?

  2. posted by Amanda on

    Erin I wonder if your unclutterer side would be happier noting the 19.6% decrease in moving and storage expenses?

  3. posted by L. on

    I don’t think I buy your argument. Aside from mobile communication devices, the corresponding communication services, and “information processing equipment” (computers, I expect?), people are mostly spending more on things of largely intangible value: pets, education, child care, health care, housing, and leisure equipment (sporting equipment + guns; I assume that includes things like kayaks, bikes, etc. for getting out and about).

    In the realm of cell phones, services, and computers, I don’t blame people. These are increasingly important ways to keep in touch these days. Lots of new smartphones are becoming available, but they are certainly more costly. For an individual househould, just buying one smartphone in a year could account for the sorts of increases you’re seeing here. Similarly, computers are ever more central to our lives.

    (I upgraded to a smartphone this year myself–I use it in the course of my self-employment, but I also use it for my home, so it won’t get fully deducted. A commenter makes a similar suggestion that some are trading telephony for commuting. Anecdatally, I have seen a lot more strength in the part-time self-employed job market than in the full-time traditional market, so I wouldn’t be surprised if this was a significant influence on the data.)

    Meanwhile, we see decreases on things like clothing and video and audio equipment–smaller items that might typically be places for rampant consumer spending.

    A commenter also makes a good point that none of this data is stratified by socioeconomic status, which probably has an enormous influence on spending patterns.

    I would like to see the original data at the BEA, but have spent enough time writing this comment as it is!

  4. posted by Nicole on

    But in the absence of the recession, that 2.9% would be a lot bigger, if I’m correct in assuming that he’s talking about 2.9% since 2007. It is difficult to tell from his blog post. In that sense, there’s been a reduction from the spending trend. It’s flattening out.

    Also the overall number is going to change depending on what peak or trough you’re using as your beginning measuring point. There’s been a lot of volatility.

  5. posted by Handy Man, Crafty Woman on

    How interesting. I’ve noticed people around me buying fewer things like: cars, campers, expensive outdoor and garden equipment…but it seems like nearly EVERYONE (except me) has a fancy new iphone or similar device.

    I still have my nice enough cell phone that I bought in (gasp!) 2005. I’ve been told I “need to get a new phone”, but I don’t do anything fancy with it, I just use it to talk once in a while and I have a prepaid phone plan. But others seem to think I’m “weird” because my phone is so “ancient.” HA!

  6. posted by Ann on

    It seems like with media (phones & computers and the like) people need to have the latest and greatest to be hip. My son has an iphone 4G or whatever…I have a first generation iphone with practically no apps. I use it to call (haha), text and as my calendar. I foolishly switched to my son’s old iphone 3G, but found that side by side, the Gen One was just as fast…AND that AT&T wanted me to pay more just to have it. Bang! Back to the old one.

    Sometimes you just have to place some limits.

    At our office, one of our employees constantly moaned that his computer was too slow…I asked the IT consultant to investigate and we found that he was running one work program, the internet and 4 instant message windows at the same time.

    Sometimes you just have to place some limits.

    Uncluttering goes further than just your closets, people!

  7. posted by Lindsay on


    I work in interactive E-learning and I regularly have 10-20 programs open at once, all necessary for my work (and I do try to quit ones I’m not using too much). I realize that’s probably not the case at your office, but if a computer can’t handle 1 program, an internet browser, and some chat windows it must be from the stone age.

    Having a computer that slow would stress me out so much as to damage my health, I would quit that job. It causes my muscles to tense up just thinking about the frustration.

  8. posted by Amandine on

    I think the article is a little bit misleading in that it makes it sound as if all these expenditures are simply personal choices; however, with the increase in health care costs and rise in college tuition, how can a typical family do something other than pay more? We pay more out of pocket every year for health care, whether we wish to or not. It’s not a discretionary purchase.

  9. posted by Tiffany on

    I agree with L.- it’s a documented pattern that during economic downturn, people’s spending habits shift to “little luxuries,” the things they still can afford but cost less money than the RV or boat or whatever it was that they might otherwise have bought. People are belt-tightening, they’re just not tightening it down to bare essentials.

    Also, I think Lindsay is spot-on in her response to Ann. I build websites for a living, and I too complained to my IT department that my computer was too slow. So they sent a tech to come find out, and I quote, “whether you really need” an upgrade. So, very calmly, I told the tech what I used my computer for: I have to simultaneously run Outlook, Word, Excel, Dreamweaver, Photoshop, multiple web browsers with multiple tabs for testing, PLUS the social media clients we use for updating Flickr and Twitter, plus the office IM system and all the other crap that came auto-installed on my PC that I can’t get rid of.

    One application, plus a web browser, plus a couple of chat windows is not so much to ask.

  10. posted by Mletta on

    Does the increase in spending include/reflect increases in the cost of things?

    We’re using fewer KWHs for example, but paying more because Con Ed raised rates.

    We have cut down on what we buy for food, but we still pay “more” because of the increases in food costs.

    Same with dry cleaning, laundry, rent, transportation.

    We spend more because prices have gone up and though we have cut down where we can (we can’t change rent; we pay reasonable rates overall and could not afford to move nor would it make sense), we cannot NOT ride public transportation to get to work, etc.

    Overall, we buy less and have less for what we spend. So I question this study. Others we know have seriously cut back. Nobody we know, including the wealthy is spending more.

    That said, when our most frugal (in the best and healthy way) friend had to get a new phone (his needs changed dramatically based on his profession and travel), he did a lot of research and ended up with an iPhone. He never had one before, thought he’d want one, or even really knew what it was (he does NOT pay attention to this stuff). and he’s started talking about an iPad after seeing fellow staffers use.

    A lot of it is what you are exposed to (peer group, work groups, etc.) because if you dont’ even know something exists, you’re not likely to be lusting after it.

    Meanwhile, some of the folks that would fall into the “early adopter” category with electronics and computers, smartphones, TVs, etc. ARE definitely cutting back. They’ve learned (the hard way, by getting burned with all the problems of the so-called “newest and the best” products) that this stuff is rarely, if ever, worth spending so much on. They wait for the second or third generation. And celebrate breaking their addiction to the “newest.”

  11. posted by Erin Doland on

    @Nicole — During most recessions, consumer spending falls below where it was before the recession began. So, what it could have been during a time of economic growth is irrelevant. The “news” is that it’s growing at all.

    @Amandine — Read the original article. It explains health care and education costs being picked up by other groups. For the most part, he concludes that there is no real growth in these areas. Additionally, education is a luxury good — no one is forced to go to college.

    @Tiffany and @L — That is incorrect. Their aggregate spending is greater. See the original article.

  12. posted by P.A. on

    I think it’s important to remember that these spending trend articles follow the movement of the bulk of the money, which is completely different from the spending behavior of the majority of the population.

    As far back as 2005, Citigroup found that the top 1% of US households account for 20% of US income, 33% of net worth, and 40% of what the report calls “financial net worth”. That may not seem like a whole lot, but it’s more than the bottom 95% of households put together. I think it’s safe to assume that most of us are in that bottom 95%.

    Citigroup predicted that the situation would get worse over time, and the evidence is that it has, especially given that the data Citigroup used were from around 2000, which was the height of the tech bubble. The heaviest losses when it burst were born by that bottom 95%.

    Consumer spending analysis by journalists follows the movement of money without necessarily tracking whose money it is. If the top 1-5% are buying high-end electronics, then that’s where most of the money goes and that’s what reporters say that most of us are buying. Unfortunately, that gap between what the top 1% and the bottom 95% control isn’t taken into account. The assumption is that if most of the money is moving in a certain direction, then most of the people are moving their money in that direction, and that assumption isn’t founded on facts.

    These numbers also skew our perception of the overall savings rate. When the upper 1% find themselves so flush with cash, they start spending more than they save, and they control so much of the money that their decisions overwhelm those of the rest of the population. The household savings rates of those around median income were actually decent, but because they had such a relatively small share of the wealth to work with, their behavior had little or no impact on the aggregate numbers.

    As Citigroup itself put it, “The usual analysis of the“average” U.S. consumer is flawed
    from the start.”

    Citigroup, by the way, gathered this information to help them make investment decisions. They were clear that they weren’t making moral judgments about this state of affairs, just trying to figure out how to tap into the flow of wealth. They predicted a possible backlash, but the reverse appears to be happening, with people attacking those lower than themselves on the socioeconomic scale rather than those higher. In the meantime, the NYTimes reported recently that the top few are moderating their spending, in part to avoid such a backlash. This gives the illusion that everyone is moderating their spending, even though as several have pointed out above, the cost of certain necessities has risen so much in relation to household income that this is next to impossible.

    As with Citigroup, I’m not making moral statements about this state of affairs, only saying that judging one’s neighbors by the behavior of that top 1% isn’t accurate–unless, of course, they happen to be your neighbors!

    I used to work in media, specifically in tracking how news sources were reporting on certain companies so that those companies could exert better control over their image. A significant gap between how an issue is reported and what’s actually happening is something I’ve come to expect.

  13. posted by Nicole on

    We’re slowly coming out of the recession, so of course spending is going up in the recent term. If the numbers were annual percent changes it would be a lot easier to understand what he’s saying, but saying that spending is up 2.9% over a 3 year period doesn’t provide any information. If that’s what he’s saying. The blog is not clear and there isn’t a link to the original report.

    And I dispute this “So, what it could have been during a time of economic growth is irrelevant.” If average growth from 1950-2000 is 3.6% per YEAR ( ), then yes it does matter that it’s only growing at 2.9% over a three year period. We are used to steady upward growth. Also, table 2 in that .pdf has the average Personal consumption expenditures during the recessions from 1950-2000 and the average annual growth in total consumption expenditures for 2 out of 6 of them is positive. Their growth rate is also higher than figures that would give 2.9% over 3 years.

    And, it is interesting in that Table 2, that spending on durable goods, or what you might consider “large flashy items” regularly decreases during a recession, while spending on services increases, and spending on non-durable goods (or smaller items) is mixed.

  14. posted by MsD on

    Resident economist here. I think you’re reading the stats wrong. If you look at spending minus education, healthcare and housing, it’s down from 2007. Why is that so important? Well, first remember that we had that massive inflationary period in summer, 2008, due to fuel costs, which drove up the price of everything. While prices have come down slightly since then, they have not gone back to where they were. So, as others have mentioned, spending has not even kept pace with inflation, which is the definition of “cutting back.”

    In addition, as others have also mentioned, often moving is more expensive than paying increased housing costs, which is why discounting housing is a reasonable methodology to estimate real changes in spending. So why discount the others? Well, it’s obvious one can’t cut back on healthcare, most of the time. With education, while you may consider college a “luxury,” it is absolutely necessary to move ourselves and the country forward. The hardest hit sector of the economy in this recession has been manufacturing, which used to be the refuge of poorly educated citizens for decent-paying jobs. Services have also been hit hard, and paid less to begin with, so you’re fooling yourself if you think that people can just get a job as a sales clerk or server and get by. Moreover, these increases occured at a time when college tuition was skyrocketing due to cutbacks in government support. So by saying that college is a luxury, you’re not only arguing that people shouldn’t start school during a recession (when their previously stable low-skill job became extinct), but that they also should quit school when they’re already in.

    Adding to all of this is the fact that the U.S. economy as a whole was not healthy in 2007, as you’re implying by saying that our spending level should have dropped. While the wealthiest of citizens fared quite well between 2001 and 2007, the average joe actually saw his real wages fall during this time frame.

    Overall, a .6% drop in spending during the time frame is evidence of significant belt-tightening. Sure, some of the areas od growth you cite seem frivolous, but they make up such a tiny portion of the average person’s budget such that growth doesn’t mean much. Spending $1000 a year on cell phones and laptops instead of $800 pales in comparison to the fact that my food budget, buying all of the same things and in many cases their cheaper alternatives, has doubled in that time frame. Food accounts for well over $1000 a year for the typical family, and since electronics account for less, you’re missing the big picture here.

  15. posted by BD on

    Typically I like this blog, but I scoffed at your post that education is a luxury good. Perhaps for some, but studies have demonstrated the vast difference between the incomes of those without degrees and those with college degrees. Degrees protect against unemployment. Not to mention the impact of degrees on the outcomes for women and minorities. To label it a luxury good is to ignore the realities of American society.

  16. posted by Margaret Picky on

    The trends are indeed reassuring overall.

    What stands out to me is the huge increase in spending on health care during a period in which people presumably have been foregoing medical expenses. Health care costs are still wildly uncontrolled with the U.S. spending 2-3 times as much per person on average than other developed nations but with a less healthy population and shorter lifespans to show for it.

  17. posted by timgray on

    I find it entertaining the number of people here that think a degree = magical job. My wife is a CPA with two Bachelors degrees. she has been unemployed for 2 years and has been applying to 3 jobs a day for those two years. She cant get a job even at a store because of the BS lie that is “overqualified”… I told her to lie and hide her education, she refuses to lie as it’s against her beliefs and character.

    Plus you have a glut of degrees that will be flooding out of schools here in about 2 years. all those unemployed will now have Associates degrees that will simply make it harder out there and dilute the value of the degree.

    A degree will not magically create jobs that pay a living wage either. I have notice that AS and BS degree, wage levels have dropped significantly over the past 3 years.

  18. posted by PBJ on

    Another scenario that has affected our family’s spending during this recession is the items that used to be paid for by our employer are now paid for by us. We both had cell phones that were provided by our place of work up until last year when we were told they would no longer be provided. Granted we are still required to be available at virtually all times, but now it is through new phones that we had to pay for. Also, when deciding to make this shift, we eliminated our landline and chose more capable phones with larger plans than we would have in the past to compensate. From what I hear in our area, this has happened to others as well.

  19. posted by Kate on

    I’m wondering if you can really say Americans aren’t cutting back because they’re still buying things like nice cell phones. Forgoing a $50,000 car with sky-high insurance and instead buying a $300 cell phone with a $100/month plan might not be going entirely frugal (Forgive the roughness of these numbers as I’ve never actually bought a nice cell phone), however buying a cell phone isn’t going to break the bank nearly as quickly as that car.

    Also, I think it might be hasty to call some of those smart phones luxury purchases. Some jobs require their employees to carry a Blackberry. In fact, the some majors beginning at my university this year will be required to have an iPhone or iTouch (which is being provided free with their [also required] computer purchase).

    It is true that an iPhone is unnecessary for most people, but a growing number are buying them for uses other than being able to check Facebook from the driver’s seat of their Bentleys (or I guess now that would be their Corollas).

  20. posted by Gal @ Equally Happy on

    If you think about it, the things we’re cutting down on are the things we usually finance through major debt (cars, furniture, homes and so on). The small luxuries are things we either pay cash for or credit cards. Since many people are having issues getting approved for large scale credit, it makes sense that they’re spending less on it than they were before.

  21. posted by MsD on

    There was just a major story today about how there are hundreds of thousands of high-skill manufacturing jobs available, and no one qualified for and willing to take them. While college is not required for many of the jobs profiled, training is, and that training is a form of education that must be paid for. The most informative article I read on this topic indicated that if all of those jobs could be filled, the unemployment rate would fall to below 7%. Getting hundreds of thousands of people back to work would increase spending and spur growth in other economic sectors, getting more people back to work. Also, allowing companies to fulfill all the demand for their products would reduce scarcity and bring prices down.

    I personally think training programs for jobs like these would be a wise use of government funding (if you spend $10,000 educating someone for a job that makes $40,000 a year, you’ll recoup your investment in tax revenues and saved support program spending in a really short time). But since that hasn’t happened yet, individuals spending their own money, or borrowing, for this training is also a wise financial move.

    To be sure, spending on a lavish college when you are hard up is probably not a good idea, but education, when well-planned, is almost always a good investment.

  22. posted by deRuiter on

    It’s not true that people are spending the same as before the depression hit. The Feds are frustrated that American consumers have not gone back to their profligate spending. Personal savings rate in the US is up to 6% from .5% or sometimes a negative amount. I am holding off buying a car because I don’t want to give Government Motors my money. My current vehicle works fine, is 15 years old. I have the cash to buy new, I want shiny new, but the brand we always purchased is now under government control and the first product designed and built under Obama is the Volt, a massively taxpayer subsidized electric lemon which is comparable with a $17,000. gas powered vehicle from non government controlled companies. I am afraid to buy a Government Motors car because Government obviously does not know anything good about car building. Also there is the lie that Government Motors has paid back its debt. That is not true, it is only shifting around funds, another Government habit. Better to hold on to my money while we wait for the next wave of deflation / recession / depression. Americans are saving more, they can’t be spending as much as pre recession.

  23. posted by John Hirt on

    Compare the 1.7 million buyers of iPhone4 and the 40,000 odd who crushed each other in Atlanta to apply for mortgage relief. They may not be related and there may be some overlap of participants but is there a possible move away from trapped, fixed location home-owners with jobs or without, to mobile entrepreneurs renting where opportunity appears?
    Removing obstacles to flexibility can open up more possibilities and choices.

Comments are closed.