And what does it mean?
We've often discussed household debt as an indicator of economic growth. The more debt a household has, the less likely it is to take on 'new' debt or eventually to curtail spending. Given that consumers drive about 65% of the US economy, a pullback in spending can often mean a recession.
Currently, household debt is relatively low and given the current level of employment, there is little indication that consumer debt will be the cause of a slowdown.
By looking at how we're spending our money we can also see potential indications of parts of the economy that might show strength or weakness.
- Housing is usually the single biggest 'cost' for most households, is it increasing or decreasing as a percentage of spending?
- Throughout the 1980s and 1990s we often heard about the poor US savings rate, is that true today?
- How much is medical insurance and care really drawing down our income?
The US Bureau of Labor Statistics happens to track all of this spending. Unfortunately, the BLS does not include TAXES as part of the calculation. In the chart below, we can see some interesting changes over the last 35 years:
- Housing continues to be the largest single 'expense' to the household budget but has been slowly decreasing for the last 10 years.
- Transportation has been trending lower for decades.
- Food trended lower until a decade ago and has leveled out.
- 'Savings' (Insurance, Pension Savings and Social Security) have been trending higher for two decades.
- Health Insurance and Medical Expenses have been increasing rapidly for over a decade, but might be showing signs of leveling off.
- Entertainment has remained relatively level as have charitable contributions.
- Education has been rising steadily over the entire period although now shows some signs of leveling.
We believe that demographics drive some of the important trends. For instance, Baby Boomer downsizing and lower interest rates may be a major factor in the drop in Housing costs. Demographics might also be a reason for the leveling of education costs as the end of the massive Millenial wave has graduated from college.
The drop in transportation costs is most likely driven by technology changes, better vehicle mileage and lower fuel costs from advanced location and extraction technologies.
While healthcare costs have leveled off, it is likely that aging Boomers and 'coupling' Millenials (likely to start families) will again drive those costs higher versus the family budget in the future.
Understanding how and why the family budget is spent can give us an idea of how the economy will grow and what companies will benefit and where to invest.
*thanks to Politcalcalculations.blogspot.com for the chart