Consumer Spending Habits Are Changing Big Time ... It's the Cellphone, Stupid!

The world is awash in debt. That's no surprise. Thus, individuals, cities and countries are reining in spending across the board. That's an inevitable outcome of bringing debt in relation to income back in balance. It will take considerably more time.

As a result of debt servicing costs, including interest and principal, demand is weaker than it otherwise would have been by now. Similarly, capacity utilization and unemployment have both been affected negatively. That's been unavoidable, too.

But in addition, there are fundamental changes underway in what we are spending our money on when we do decide to buy. Such things as fewer car and home purchases, less clothing, less entertainment, eating out and so forth on the downside, of course, but there are some upsides as well.

Consumers, cities and nations alike are buying buying different things than has been the historic case. We'll focus on consumers herein.

So let's look briefly at how consumer spending is changing and its potential longer term impact on our U.S. manufacturing base and therefore employment.

I recently saw an interesting chart about the components of our current consumer spending in relation to a few short years ago and was somewhat surprised by what it says and possibly portends as well.

Cellphones Are Eating the Family Budget is worth reading. It concerns the growing relative importance of cellphone spending in relation to other consumer purchases.

"Heidi Steffen and her husband used to treat themselves most weeks to steak . . . near their hometown of Milbank, S.D. Then they each got an iPhone, and the rib-eyes started making fewer appearances.

"Every weekend, we'd do something," said Ms. Steffen, a registered nurse whose husband works at a tire shop. "Now maybe once every month or two, we get out."

 

More than half of all U.S. cellphone owners carry a device like the iPhone, a shift that has unsettled household budgets across the country. Government data show people have spent more on phone bills over the past four years, even as they have dialed back on dining out, clothes and entertainment—cutbacks that have been keenly felt in the restaurant, apparel and film industries. . . .

Labor Department data released Tuesday show spending on phone services rose more than 4% last year, the fastest rate since 2005. During and after the recession, consumers cut back broadly on their spending.

But as more people paid up for $200 smartphones and bills that run around $100 a month, the average household's annual spending on telephone services rose to $1,226 in 2011 from $1,110 in 2007, when Apple Inc.'s iPhone first appeared.

Families with more than one smartphone are already paying much more than the average—sometimes more than $4,000 a year—easily eclipsing what they pay for cable TV and home Internet....

But the question for the industry is how much bigger bills can get before the cuts in other parts of the family budget grow too painful. . . .

Carriers fully expect people to use more data and pay more for it. "Speed entices more usage," Verizon Chief Financial Officer Fran Shammo said at an investor conference last week, according to a transcript. "The more data they consume, the more they will have to buy."

But some question where the money for that data will come from. Americans spent $116 more a year on telephone services in 2011 than they did in 2007, according to the Labor Department, even as total household expenditures increased by just $67.

Meanwhile, spending on food away from home fell by $48, apparel spending declined by $141, and entertainment spending dropped by $126. The figures aren't adjusted for inflation.

The increase in telephone-services spending masks an even higher rise in cellphone bills, because people have been paying less for landline service. . . .

Almost nine in 10 of all U.S. adults have a cellphone, according to a Pew Research Center survey. Middle-income consumers increased their telephone spending in 2011 by $59, almost as much as the $64 in additional telephone spending by the 20% of consumers with the highest incomes, according to the Labor Department data.

As wireless service gets more expensive, the trade-offs become more painful. That could threaten to further crimp consumer spending elsewhere—or slow the upward swing in consumer spending on wireless."

Summing Up

We're spending more for cellphones and less for such things as cars and eating out at restaurants.

The cellphones aren't made in America, and this is just another example of the trend away from U.S. manufacturing. It's not a cyclical but a long term structural issue.

In my view, many of our employment problems are of a long term nature and related to the downsizing of our manufacturing base. Not all of the jobs lost during the last decade will return, even as the U.S. economy recovers over time.

And as the world becomes more digitally centered and the internet becomes more integrated as part of our daily lives, our U.S. employment plight will only get more difficult unless and until we reach cost competitive parity with other countries. We simply aren't able to compete right now, regardless of what the politicians say.

So how we'll ever as a nation be able to "save the middle class" without our workforce being able to compete globally is absolutely beyond my ability to comprehend.

And if our 'leaders' ever decided to be honest and come clean about all this global competitiveness stuff, it's undoubtedly beyond the ability of our politicians and union leaders to comprehend as well. 

At least that's my take.

Thanks. Bob.