The recession ended in mid-2009. Since then spending on services has lagged spending on durable goods by a huge margin.

Why? A record number of Millennials, adults aged 18 to 32, put off household formation and stay at home to live with parents.

Why? No job and/or huge college debt with no way to pay it back.

The jobless rate for Americans aged 18 to 19 years old stood at 19.2%. Unemployment among 20- to 24-year-olds is 11.6 percent. In contrast, the overall unemployment rate is 7%.

Kids Living in Basements a Drag on U.S. Services Spending

Bloomberg reports on the Haircut Deficit, Kids Living in Basements a Drag on U.S. Services Spending.

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.

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. 

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.

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.

What’s Next?

Via email, a close friend “BC” commented on “What’s Next”

The top 1-10% receive 50% of income in an economy in which 72% of GDP is Personal Consumption Expenditures (PCE). Unless the top 10% increase spending ~6%/yr., US real final sales per capita will be near 0% at the trend population and reported deflator.

The bottom 90%, who receive the other 50% of income, are not experiencing any growth of purchasing power after factoring in taxes, inflation, and debt service. They contribute little-to-nothing in growth of real final sales per capita.

Once the Boomer top 10-20% replace their auto fleets, real retail sales and real final sales per capita will again contract.

Wealth Effect

I would add that some of the spending, especially on autos, is due to the wealth effect of rising stock market and recovery in home prices. A substantial (and lengthy) decline in the stock market is long overdue. And when it comes it will pressure sales and services in general.

What’s coming isn’t pretty even though the precise timing is unknown.

Mike “Mish” Shedlock