Sunday, November 27, 2011

The Atypical Recovery Leads to a Typical Rebounds in Goods Spending, but Lagging Services Spending

A very interesting story in the WSJ last week showcasing the divergence between spending on goods versus services during this rebound in the economy.  The consumer has gone back to spending on goods in quite typical fashion in a post recession period.  Services?  Not so much.  We've noted in the past that even spending on healthcare (one would assume a 'very important' service) has lagged in this recovery.  It appears a limited consumer is picking and choosing where those spending dollars will go - and when forced to choose, services lose.  The implications on employment for a country which has transformed itself as a country of 'service' jobs versus 'goods producing' are obvious.

  • But there are already signs that consumers have changed their behavior in ways not seen during other economic cycles—and the recovery is suffering because of it.
  • When consumers spend now, their dollars are far more likely to flow to goods like cellphones, clothes or even cars than to services like getting hair cuts, dining at restaurants or flying on planes. Such restraint in spending on discretionary services has big implications for the economy. In healthy times, about one-third of consumer spending goes toward these types of services, which are a key driver of job creation.
  • It is normal for spending on goods to bounce back faster than service spending during a recovery, but this time around, the disparity is especially stark. Since the second quarter of 2009, when the recovery began, spending on discretionary services—or those besides housing, health care and certain banking services—has grown a mere 2.8%, when the figures are adjusted for inflation, according to a Wall Street Journal analysis of Commerce Department data.
  • Spending on goods is up a healthy 9.1% in this time period, meanwhile, roughly in line with past recoveries. That compares with 11.7% growth in spending on discretionary services and 12.8% growth in spending on goods seen at this point in the recovery that followed the 2001 recession.

  • Kate Bagoy typifies this split. The 33-year-old graphic designer earns $90 an hour for contract and freelance work. But with the economy shaky and work less plentiful, she has been holding back on spending for services. She now waits 10 weeks between haircuts, compared with six weeks before, and she eats out less. And yet, she recently shelled out $2,000 for a new bed and took on a car loan to get a new Volkswagen.
  • The difference, she said, is that services represent fleeting experience, as compared with buying something with enduring value. "I can skip a dinner or two to pay off a credit card, but I'm going to have this bed for 20 years," she said.
  • This approach to thrift implies that the recession mindset continues to influence consumer behavior more than two years into this recovery.  Increasingly, that means service businesses find it harder to get their share of consumer spending, which is prompting many business owners to scale back
  • "Services account for about half of GDP, and over half of jobs," Mr. Krueger said. "Particularly discretionary services…people have been putting off getting their cars repaired because of concerns about jobs and income growth."
  • Even more-essential services are getting hit hard. Through the third quarter, spending on car repairs was 14.1% below the level it was in fourth quarter of 2007, the last quarter before the last recession started. Spending on moving and storage was down 5.4% during the same period, while spending on veterinary services dropped 3.9%.
  • Spending on goods, meanwhile, has been much healthier. Sales of personal technology like phones and video equipment are well above prerecession levels. Overall adult apparel sales were up 1.2% through the first nine months of 2011 versus the same time period a year ago, according to research firm NPD Group.

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