The U.S. economy is suffering a service interruption.
Consumer spending on services -- everything from rents and water bills to health care and haircuts -- is a laggard as the economy has recovered from the worst recession since the Great Depression. Such expenditures adjusted for inflation have risen 6.3 percent since mid-2009, compared with a 34 percent surge in outlays on durable goods such as automobiles and appliances, according to data from the Commerce Department in Washington.
Slow services spending is “the culprit behind sluggish growth” of the economy, said Carl Riccadonna, senior U.S. economist at Deutsche Bank Securities Inc. in New York.
Outlays have been held back by a slowdown in new household formation and meager wage growth. As young adults stay home with their parents rather than forging out on their own, spending on utilities and amenities such as cable television has languished.
Purchases of durable goods have been quicker to recover. Some of the growth is driven by record-low interest rates, supporting auto sales that account for almost a quarter of the increase in spending on long-lasting items. Another contributor is pent-up demand for replacement of aging household goods such as appliances and furniture. Neither force has much effect on purchases of services, which are more likely than durable goods to be paid for in cash.
A turnaround in outlays for services is key to the economy breaking free of the roughly 2 percent growth rut it’s been stuck in over the past 4 1/2 years and achieving what economists call escape velocity. Personal consumption of services accounted for 45.4 percent of $16.2 trillion in gross domestic product last year, down from 46.1 percent in 2009.
“If service spending starts to normalize, many economists are going to be very much surprised on the upside” by growth next year, said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. “As the cyclical recovery gains traction, we should see stronger rates of household formation.”
He sees GDP rising 3 percent in 2014, faster than the median forecast of 2.6 percent in a Bloomberg poll of 74 economists conducted Dec. 6-11. Growth this year will be 1.7 percent, according to the survey.
Expenditures on housing-related services, mainly rents and utilities such as electricity, made up more than a quarter of personal consumption of services in 2012. Those outlays have been hit most directly by the slowdown in new household formation.
From 2008 through this year, the annual rise in the number of households has averaged less than 1 percent. That compares with an average year-over-year gain of about 1.7 percent in Census Bureau data going back to 1948.
“If you look at household size, the average number of people per household has gone up,” said Mark Vitner, a senior economist in Charlotte, North Carolina, at Wells Fargo & Co., the biggest U.S. home lender. “Consumption of household services by person has actually gone down because it’s the same amount of space consumed by three people instead of two.”
Millennials -- adults aged 18 to 32 -- are still slow to set out on their own more than four years after the recession ended, according to an Oct. 18 report by the Pew Research Center in Washington. Just over one in three head their own households, close to a 38-year low set in 2010.
Unemployment among younger adults has played an important role in that development, said Richard Fry, author of the report. The jobless rate for Americans aged 18 to 19 years old stood at 19.2 percent last month, more than double the 7 percent rate for the nation as a whole, according to data from the Labor Department in Washington. Unemployment among 20- to 24-year-olds was 11.6 percent.
Limited growth in the number of households is prompting service providers such as broadband engineer ARRIS Group Inc. (ARRS:US) of Suwanee, Georgia, to focus on expanding options that cable operators can provide to existing customers rather than broadening the client base.
“Unless we start to see more household formation, there aren’t more subscribers to be had right now,” Chief Executive Officer Robert Stanzione said at a Nov. 19 technology conference. Cable operators are trying to “upsell people to buy more expensive packages or more valuable packages.”
More young people may set out on their own next year, as the expanding economy lowers youth joblessness, said Jed Kolko, chief economist for Trulia Inc., a San Francisco-based online real estate information service.
“We could start to see this next year, but it certainly won’t end next year. It will take many years,” Kolko said. “You don’t find a job and then move out the next day. You want to have a stable job that you’re confident will still be there six months or a year from now, before you go out and rent a place, much less go out and buy a place.”
Slow job gains have prevented incomes from accelerating. Average hourly earnings for production and non-supervisory employees rose 2.2 percent in November from a year earlier, compared with a 4.1 percent annual gain in 2007 before the recession, according to Labor Department data.
Growing income inequality also may be playing a role, squeezing the take-home pay of those less well-off and forcing them to scrimp on spending, said William Dunkelberg, chief economist of the National Federation of Business.
The richest 10 percent of Americans last year earned more than half of all income, the largest total since 1917, according to Emmanuel Saez, an economist at the University of California at Berkeley.
The steep rise in spending on durable goods has largely been fueled by a surge in loans to purchase automobiles.
Outstanding automotive loan balances climbed to a record-high $782.9 billion in the third quarter, $103 billion more than the same three-month period in 2012, according to seven years of data from industry researcher Experian Automotive. Thirty-day auto loan delinquencies fell, and six-day delinquencies were unchanged from last year’s third quarter.
“The availability of credit, combined with consumers continued strong performance repaying their loans, has a positive spiral effect,” Melinda Zabritski, Experian’s senior director of automotive lending, said in a Nov. 13 statement.
Service providers aren’t looking for a big boost to business next year, according to a semiannual survey of 350 companies conducted by the Tempe, Arizona-based Institute for Supply Management. They see revenue rising 3.6 percent in 2014 after climbing 4 percent this year, the Dec. 10 report found. Manufacturers by contrast see sales growth accelerating to 4.4 percent in 2014 from 3.4 percent this year.
“By and large folks are still very value-focused on services, and that’s likely to keep them growing fairly modestly,” Wells Fargo’s Vitner said. “Though the direction’s right -- the economy’s getting better. Income’s improving, job growth’s improving, so it should get progressively better over the next couple years.”
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