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US Consumers: Have the Past 20 Years Changed Anything?
Simon Kelley & Virginie Maisonneuve |
US consumers are important to monitor. Not only is the US the largest world economy, but the contribution of its consumers to the dynamics of the nations prosperity is also very large - at just under 70% of GDP (2014).
At a time of slowing global growth, understanding shifts in US consumption patterns is key. During the period from 1994 to 2014, US personal consumption expenditures have grown to $12 trillion at a 4.6% CAGR. This compares to a global GDP of $77 trillion, growing at 5.3%. US personal consumption expenditure accounts for 15.5% of global GDP.
A lot has happened in the past 20 years for American consumers and it is not only because of the internet! The economic crisis has also clearly had an impact on American spending patterns. In this paper we review how the “share of wallet” has shifted noticeably for the American consumer during the period and how it is a reflection of economic and societal changes. Interestingly, demographic shifts have not been the major driver of such changes of spending. Instead, health care - and more specifically – the cost of health care insurance premiums, is at the heart of the recorded shifts. Pension contribution and housing also gained share, while transportation, apparel and food have come down, reflecting pricing pressures and shifts in health habits.
At a time of slowing global growth, understanding shifts in US consumption patterns is key. During the period from 1994 to 2014, US personal consumption expenditures have grown to $12 trillion at a 4.6% CAGR. This compares to a global GDP of $77 trillion, growing at 5.3%. US personal consumption expenditure accounts for 15.5% of global GDP.
A lot has happened in the past 20 years for American consumers and it is not only because of the internet! The economic crisis has also clearly had an impact on American spending patterns. In this paper we review how the “share of wallet” has shifted noticeably for the American consumer during the period and how it is a reflection of economic and societal changes. Interestingly, demographic shifts have not been the major driver of such changes of spending. Instead, health care - and more specifically – the cost of health care insurance premiums, is at the heart of the recorded shifts. Pension contribution and housing also gained share, while transportation, apparel and food have come down, reflecting pricing pressures and shifts in health habits.
A shifting wallet share
Over the last twenty years there has been a significant change in the way consumers have allocated their available expenditure. It is no surprise that housing, transportation and food dominated consumer expenditure, accounting for just under 63% of total expenditure in 2014. If we were to include personal insurance & pensions and healthcare, the number rises to just under 82% of all expenditure.
Over the last twenty years there has been a significant change in the way consumers have allocated their available expenditure. It is no surprise that housing, transportation and food dominated consumer expenditure, accounting for just under 63% of total expenditure in 2014. If we were to include personal insurance & pensions and healthcare, the number rises to just under 82% of all expenditure.
Source: U.S. Bureau of Labor Statistics, own estimates
What is interesting is that since 1994 the largest changes to share of consumer expenditure (‘wallet’) has benefited healthcare, housing, personal insurance & pensions and education - cumulatively adding 618 basis points of share. This has been at the expense of food, apparel and transportation which has lost 517 basis points of share of wallet. Our analysis shows that though there has been a significant change in the demographic makeup of the US consumer, the largest shifts in allocation of spend have been driven by structural issues. Relatively lower vehicle ownership and running costs and apparel costs, together with lower meat consumption, have driven the lower spend allocated to food, transportation and apparel. Whilst increased medical insurance, pension & social security and home rental expense have driven an increasing share of spend in healthcare, housing and personal insurance & pensions.
Source: U.S. Bureau of Labor Statistics, own estimates
Demographic shift not the key driver of significant changes in share of spend
Clearly there has been a large demographic shift in the US consumer over the last twenty years. The Bureau of Labor Statistics splits the US Consumer into six different age groups, the lowest three age groups (under 25’s to 44 year olds) have all witnessed a decline in their respective share of total consumer units, whilst the highest three age groups (45+ age groups) have all seen an increase. Put another way, over the last 20 years, the number of consumer units have increased by 24.3% in absolute terms or 24,796 new units, with the three highest age groups adding 24,902 new units. With this significant demographic redistribution of consumer units, one could argue that if the over 45 age group allocated a disproportionately higher amount of its spend on healthcare, housing, personal insurance & pensions over food, apparel and transportation, this would explain the overall shift.
Clearly there has been a large demographic shift in the US consumer over the last twenty years. The Bureau of Labor Statistics splits the US Consumer into six different age groups, the lowest three age groups (under 25’s to 44 year olds) have all witnessed a decline in their respective share of total consumer units, whilst the highest three age groups (45+ age groups) have all seen an increase. Put another way, over the last 20 years, the number of consumer units have increased by 24.3% in absolute terms or 24,796 new units, with the three highest age groups adding 24,902 new units. With this significant demographic redistribution of consumer units, one could argue that if the over 45 age group allocated a disproportionately higher amount of its spend on healthcare, housing, personal insurance & pensions over food, apparel and transportation, this would explain the overall shift.
Source: U.S. Bureau of Labor Statistics, own estimates
In 1994 there were only three categories in which the over 45’s had a higher percentage of spend relative to the under 44’s, these were healthcare, cash contributions (gifts) and reading. Note: healthcare and cash contributions were the primary outliers with 330bp and 280bp more spend allocated to them respectively. On the negative side housing and transportation were the clear standouts, with 154bp and 165bp lower spend. If the redistribution of spend over the last twenty years was largely driven by the demographic shift, the categories in which the argument could be made, would be healthcare and transportation - and to a lesser extent - food and apparel. However, it would not explain the considerable increase in spend allocated to housing and personal insurance & pensions. This is even more true for housing as the percentage spend gap between over 45’s and under 44’s widens further on the negative side between 1994 and 2014.
It is worth noting that by 2014 the over 45’s had added personal care, entertainment and tobacco as categories in which they had a higher percentage of spend allocated over the under 44’s, though the numbers are marginal.
It is worth noting that by 2014 the over 45’s had added personal care, entertainment and tobacco as categories in which they had a higher percentage of spend allocated over the under 44’s, though the numbers are marginal.
Source: U.S. Bureau of Labor Statistics, own estimates
If we were to isolate the impact of purely the demographic shift on the share of consumer spend, we find that it explains 23% of the change in healthcare spend, 14% in transportation and 8% in food and apparel. Other than healthcare, these are not meaningful explanations for the changes in share of wallet that we have witnessed. Moreover, the demographic impact on housing and personal insurance and pensions should have resulted in these segments losing share. However, as we have seen, they have been significant beneficiaries. This leads us to the conclusion that the changes we have seen in the consumer allocation of spend have largely been due to structural drivers rather than driven by demographic changes.
Health insurance premiums driving a broad-based increase in healthcare expenditure
Healthcare has witnessed the largest increase in share of spend of all the consumer categories. We estimate that approximately a quarter of the increase has come from the shifting demographic profile of the US consumer. It is no surprise that the correlation of spend allocated to healthcare increases with age, with the over 65 years’ category witnessing the highest allocation (13.5% in 2014) and under 25’s the lowest (3.4%). However, over the last twenty years all age groups have seen an increase in the allocation of spend towards healthcare, with notable increases for the 35 to 64-year age groups, substantiating the argument that the key driver has not been the demographic shift. It will be no surprise that the driver of the broad-based growth has been the rise in health insurance premiums, accounting for a 280bp increase in share, whilst drugs & medical supplies are flat and medical services are down 30bp as share of spend.
Health insurance premiums driving a broad-based increase in healthcare expenditure
Healthcare has witnessed the largest increase in share of spend of all the consumer categories. We estimate that approximately a quarter of the increase has come from the shifting demographic profile of the US consumer. It is no surprise that the correlation of spend allocated to healthcare increases with age, with the over 65 years’ category witnessing the highest allocation (13.5% in 2014) and under 25’s the lowest (3.4%). However, over the last twenty years all age groups have seen an increase in the allocation of spend towards healthcare, with notable increases for the 35 to 64-year age groups, substantiating the argument that the key driver has not been the demographic shift. It will be no surprise that the driver of the broad-based growth has been the rise in health insurance premiums, accounting for a 280bp increase in share, whilst drugs & medical supplies are flat and medical services are down 30bp as share of spend.
Source: U.S. Bureau of Labor Statistics, own estimates
Despite lower mortgage costs, rental costs are driving a strong increase in housing share spend
Housing has seen the second largest increase in share of spend over the last twenty years. This is surprising as the demographic shift should have negatively impacted the sector. Again there has been a broad-based increase in share of spend across all age groups. Interestingly the under 25’s age group had the lowest allocation of spend to housing in 1994 at 30.2% - but by 2014 it had the highest at 35.8%. Rental costs were the key driver of this. We estimate that in 1994 this represented 15.1% of under 25’s spend versus 20.4% in 2014. The largest increase in absolute spend came from the over 55 age group, with housing spend increasing at a CAGR of 5.7% versus 4% for the category as a whole. The largest driver of this increase has been rental costs, which have contributed 110bp of the 143bp increase. Property taxes have added 70bp and ‘maintenance, repairs, insurance and other expenses’ are up 40bp. Not surprisingly, mortgage interest and charges are down (50bp), as is household furnishings and equipment spend (130bp). However, this is a segment where the consumer has benefitted from a lack of inflation. We estimate that real consumer expenditure has grown at a CAGR of 1.7% pa over the last twenty years, while household furnishings and equipment spend has grown at a real rate of approximately 1.8%.
Housing has seen the second largest increase in share of spend over the last twenty years. This is surprising as the demographic shift should have negatively impacted the sector. Again there has been a broad-based increase in share of spend across all age groups. Interestingly the under 25’s age group had the lowest allocation of spend to housing in 1994 at 30.2% - but by 2014 it had the highest at 35.8%. Rental costs were the key driver of this. We estimate that in 1994 this represented 15.1% of under 25’s spend versus 20.4% in 2014. The largest increase in absolute spend came from the over 55 age group, with housing spend increasing at a CAGR of 5.7% versus 4% for the category as a whole. The largest driver of this increase has been rental costs, which have contributed 110bp of the 143bp increase. Property taxes have added 70bp and ‘maintenance, repairs, insurance and other expenses’ are up 40bp. Not surprisingly, mortgage interest and charges are down (50bp), as is household furnishings and equipment spend (130bp). However, this is a segment where the consumer has benefitted from a lack of inflation. We estimate that real consumer expenditure has grown at a CAGR of 1.7% pa over the last twenty years, while household furnishings and equipment spend has grown at a real rate of approximately 1.8%.
Source: U.S. Bureau of Labor Statistics, own estimates
Broad-based pension and social security spend increases share of wallet
Personal insurance and pensions has seen the third highest rise in share of spend over the last twenty years, up 139bp to 10.7%. Again this is a segment that should have seen a negative demographic impact given that the over 45’s spent on average 90bp less than the under 44’s as a share of total spend in 1994. As with healthcare and housing, every age group increased its share of spend over the last twenty years. The largest gain came for the 55 to 64-year age group, increasing spend by a CAGR of 7.2% and share of wallet by 236bp. The driver of the growth has been pension and social security costs, increasing by 203bp as a share of wallet and growing at a CAGR of 4.9%, whilst life & personal insurance is down 64bp growing at a mere 0.1%.
Personal insurance and pensions has seen the third highest rise in share of spend over the last twenty years, up 139bp to 10.7%. Again this is a segment that should have seen a negative demographic impact given that the over 45’s spent on average 90bp less than the under 44’s as a share of total spend in 1994. As with healthcare and housing, every age group increased its share of spend over the last twenty years. The largest gain came for the 55 to 64-year age group, increasing spend by a CAGR of 7.2% and share of wallet by 236bp. The driver of the growth has been pension and social security costs, increasing by 203bp as a share of wallet and growing at a CAGR of 4.9%, whilst life & personal insurance is down 64bp growing at a mere 0.1%.
Source: U.S. Bureau of Labor Statistics, own estimates
Benign inflation in vehicle ownership costs helps reduce transportation share of spend
Transportation represents the second largest category in terms of consumer spend. Vehicle purchase costs and ‘other vehicle expenses’ (finance, maintenance & repairs, insurance and rental) represent the two largest sub-categories and the majority of transportation costs. Overall transportation share of spend was down 208bp. The majority of this was driven by new vehicle purchase spend (down 240bp) and ‘other vehicle expenses’ (down 110bp). This is despite gasoline and motor oil increasing its share of spend by 150bp over the same period. Data from the American Automobile Association suggests that the average cost of owning and operating an automobile has increased by 2.2% CAGR between 1994 and 2013, the cost of ownership (fixed) growing at 1.5% CAGR and the variable costs at 4% CAGR, (the largest input is fuel). Hence, the lower owning and operating costs relative to overall consumer spend explains the loss of share of spend to the category. However, as the number of vehicles per consumer unit remains unchanged at 1.9 between 1994 and 2014 suggests, this is a category where the consumer has benefitted from industry dynamics and lower inflation.
Falling meat consumption largely driving the loss in share of food spend
Food is the third largest category of consumer spend. The segment has lost 126bp of share of spend over the last twenty years. Inflation has not been the culprit, running at a CAGR of 2.6% (1994/2014). The largest driver of the loss has been food at home, down 112bp, food away from home is slightly down (-13bp). Within the age groups only one has seen an increase in share of spend (25 to 34 years old), which was driven by eating out, food at home for this age group was also down during the period. The largest fall of share of spend has been for the under 25’s and over 65’s at 235bp and 245bp respectively, though it is worth noting that in 1994 these age segments had the highest allocation of spend to food.
Transportation represents the second largest category in terms of consumer spend. Vehicle purchase costs and ‘other vehicle expenses’ (finance, maintenance & repairs, insurance and rental) represent the two largest sub-categories and the majority of transportation costs. Overall transportation share of spend was down 208bp. The majority of this was driven by new vehicle purchase spend (down 240bp) and ‘other vehicle expenses’ (down 110bp). This is despite gasoline and motor oil increasing its share of spend by 150bp over the same period. Data from the American Automobile Association suggests that the average cost of owning and operating an automobile has increased by 2.2% CAGR between 1994 and 2013, the cost of ownership (fixed) growing at 1.5% CAGR and the variable costs at 4% CAGR, (the largest input is fuel). Hence, the lower owning and operating costs relative to overall consumer spend explains the loss of share of spend to the category. However, as the number of vehicles per consumer unit remains unchanged at 1.9 between 1994 and 2014 suggests, this is a category where the consumer has benefitted from industry dynamics and lower inflation.
Falling meat consumption largely driving the loss in share of food spend
Food is the third largest category of consumer spend. The segment has lost 126bp of share of spend over the last twenty years. Inflation has not been the culprit, running at a CAGR of 2.6% (1994/2014). The largest driver of the loss has been food at home, down 112bp, food away from home is slightly down (-13bp). Within the age groups only one has seen an increase in share of spend (25 to 34 years old), which was driven by eating out, food at home for this age group was also down during the period. The largest fall of share of spend has been for the under 25’s and over 65’s at 235bp and 245bp respectively, though it is worth noting that in 1994 these age segments had the highest allocation of spend to food.
Source: U.S. Bureau of Labor Statistics, own estimates
The key driver of the 126bp loss of share can be explained by falling meat consumption at home, in particular beef, pork and poultry. Falling meat consumption accounts for half of the loss of share. Falling cereal and bakery product spend at home accounts for another 30bp. It is worth noting that fruit & vegetables, dairy products and egg consumption at home is largely flat on 1994. Meat consumption has grown at 2.1% CAGR over the period with inflation running at 3.5%, which suggests quite a significant change in consumption patterns with real growth running at -1.4% pa.
Increased competition and low-cost production in apparel benefitting the consumer
Apparel spend has grown at 1.5% CAGR over the last twenty years, resulting in a 184bp decline in share of spend. This decline has been across all the age groups. However, deflation has been a key driver in this segment largely driven by increased competition and outsourcing to low cost producers. We estimate deflation to have averaged 0.3% pa over the period. We estimate that real consumer spend has grown at approximately 1.7% pa, however apparel has grown at approximately 1.8% pa, hence another segment in which the consumer is benefitting from changing industry dynamics. Within the category, women’s wear has seen the largest loss of wallet share (-80 basis points), with men’s down 40bp, children’s wear (under 2yrs) and footwear have been more resilient, largely flat on the period.
Conclusion
A number of factors have led to reduced share of wallet for consumer goods over the last twenty years. The primary factors have been increased competition and proliferation in consumer goods and the role the internet has played in price and quality discovery, as well as choice. We believe that going forward these factors will continue to play a critical role in generally limiting inflation across consumer goods. It is evident that the consumer has become increasingly concerned with making provisions for health, retirement and welfare benefits. The last financial crisis clearly brought these factors more into focus, in particular as regards adequately planning for retirement. Moreover, the obvious focus on health is substantiated by the change in eating habits and lower allocation of spend on meat. With rising healthcare costs exacerbated by costly new treatments, and the increasing need to ensure adequate income for retirement, we believe that any positive benefits seen by the consumer, in wallet, from consumer goods competition (and the internet) certainly have the propensity to continue to be allocated to health and retirement spend over the next decade.
Simon Kelley
&
Virginie Maisonneuve
Increased competition and low-cost production in apparel benefitting the consumer
Apparel spend has grown at 1.5% CAGR over the last twenty years, resulting in a 184bp decline in share of spend. This decline has been across all the age groups. However, deflation has been a key driver in this segment largely driven by increased competition and outsourcing to low cost producers. We estimate deflation to have averaged 0.3% pa over the period. We estimate that real consumer spend has grown at approximately 1.7% pa, however apparel has grown at approximately 1.8% pa, hence another segment in which the consumer is benefitting from changing industry dynamics. Within the category, women’s wear has seen the largest loss of wallet share (-80 basis points), with men’s down 40bp, children’s wear (under 2yrs) and footwear have been more resilient, largely flat on the period.
Conclusion
A number of factors have led to reduced share of wallet for consumer goods over the last twenty years. The primary factors have been increased competition and proliferation in consumer goods and the role the internet has played in price and quality discovery, as well as choice. We believe that going forward these factors will continue to play a critical role in generally limiting inflation across consumer goods. It is evident that the consumer has become increasingly concerned with making provisions for health, retirement and welfare benefits. The last financial crisis clearly brought these factors more into focus, in particular as regards adequately planning for retirement. Moreover, the obvious focus on health is substantiated by the change in eating habits and lower allocation of spend on meat. With rising healthcare costs exacerbated by costly new treatments, and the increasing need to ensure adequate income for retirement, we believe that any positive benefits seen by the consumer, in wallet, from consumer goods competition (and the internet) certainly have the propensity to continue to be allocated to health and retirement spend over the next decade.
Simon Kelley
&
Virginie Maisonneuve
ABOUT THE AUTHORS
Simon Kelley
Independent Contributor
Simon is a global consumer equity specialist. He started covering the sector as an analyst at JP Morgan. In 2004 he switched to the buy-side, firstly at Pictet Asset Management as a global consumer Sector head before becoming a hedge fund portfolio manager at Citadel, Millennium and Citi Principal Strategies. Most recently he was Global Consumer Portfolio Manager at PIMCO. Simon holds an undergraduate law degree, two post-graduate law degrees and an MBA from the University of Oxford. Simon is a qualified Barrister, (1994 call).
Independent Contributor
Simon is a global consumer equity specialist. He started covering the sector as an analyst at JP Morgan. In 2004 he switched to the buy-side, firstly at Pictet Asset Management as a global consumer Sector head before becoming a hedge fund portfolio manager at Citadel, Millennium and Citi Principal Strategies. Most recently he was Global Consumer Portfolio Manager at PIMCO. Simon holds an undergraduate law degree, two post-graduate law degrees and an MBA from the University of Oxford. Simon is a qualified Barrister, (1994 call).
Virginie Maisonneuve
Managing Director
Virginie is founder and Managing Director of Maisonneuve Global Advisors. Virginie’s background in asset management spans over 28 years and she served most recently as CIO-Equities, MD at PIMCO (London). Prior to this she worked as Head of global equities at Schroders (London), Co-CIO at Clay Finlay (New York) and held various senior portfolio management positions at State Street Research (San Francisco), Batterymarch (Boston) and Martin Currie (Scotland). She started her career as a consultant for the French Ministry of Foreign Affairs in Beijing (China).
Virginie has an MBA from ESLSCA (France) and a BA from Dauphine University (Mandarin Chinese). She also has a first degree diploma in Political Economy from People's University (Beijing, China) and is a CFA Charterholder.
Managing Director
Virginie is founder and Managing Director of Maisonneuve Global Advisors. Virginie’s background in asset management spans over 28 years and she served most recently as CIO-Equities, MD at PIMCO (London). Prior to this she worked as Head of global equities at Schroders (London), Co-CIO at Clay Finlay (New York) and held various senior portfolio management positions at State Street Research (San Francisco), Batterymarch (Boston) and Martin Currie (Scotland). She started her career as a consultant for the French Ministry of Foreign Affairs in Beijing (China).
Virginie has an MBA from ESLSCA (France) and a BA from Dauphine University (Mandarin Chinese). She also has a first degree diploma in Political Economy from People's University (Beijing, China) and is a CFA Charterholder.
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This information within this document has been provided for informational purposes only. This information does not constitute advice on investments within the meaning of Article 53 of the Financial Services and Markets Act (Regulated Activities) Order 2001. Should investment advice be required this should be obtained from a FCA authorized person.
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This information within this document has been provided for informational purposes only. This information does not constitute advice on investments within the meaning of Article 53 of the Financial Services and Markets Act (Regulated Activities) Order 2001. Should investment advice be required this should be obtained from a FCA authorized person.
Although we make reasonable efforts to validate the information provided, we make no representations, warranties or guarantees, whether express or implied, that the content in this document is accurate, complete or up-to-date.
We are the owner or the licensee of all intellectual property rights in the information provided in this document. Those works are protected by copyright laws and treaties around the world. All such right reserved.
You may print one copy and may use extracts from any page for your personal use and you may draw attention of others within your organisation to the information contained herein.
You must not modify the paper or digital copies of any materials you have printed off or downloaded in any way, and you must not use any illustrations, photographs or graphics separately from any accompanying text.
Our status (and that of any identified contributors) as the authors of the content in this document must always be acknowledged.
You must not use any part of the content provided herein for commercial purposes without obtaining a licence to do so from us or our licensors.
Maisonneuve Global Advisors Limited
1 Fore Street, 4th Floor
London EC2Y 5EJ
United Kingdom
info@MaisonneuveGA.com
www.MaisonneuveGA.com
Company No. 09823122