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By Robert Johnson, CFA and Jeremy Glaser | 05-31-2017 11:00 AM

Though Consumption Looks Steady, Watch These 4 Trends

Top-line consumption numbers obscure some important changes in spending patterns, says Morningstar's Bob Johnson.

Please note: Bob Johnson is traveling this week. His written column will return next Saturday.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. On a year-over-year basis, consumption has been fairly steady, but Morningstar's Bob Johnson thinks that there's four important trends under the surface that investors need to know about.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, often the consumption numbers can be a little bit confusing. They're reported month to month. Sometimes they are inflation-adjusted, sometimes they're not. Why is looking at them year over year the right way to think about consumption?

Johnson: Yeah. When you look at consumption year over year, it tends to take some of the small monthly changes out of it, and it makes the numbers much less volatile. If we tend to have a cold month and then maybe you tend to have a warm month, and so, that tends to balance out by averaging three--if you have an unusual event or a sale or something that messes up the numbers one year. But if you look at it year over year and average three months at a time, you're going to get a much more balanced picture of what's going on.

Glaser: And on that basis, consumption has looked pretty steady?

Johnson: It's looked pretty steady. I mean, last year we were about 2.5% consumption growth, that is last April. Now, this April, we are at about 2.7%. And all of that difference is pretty much accounted for--utilities were a relatively big subtracter a year ago, this year not so much. And so, they are basically about 2.7% in each year, so little changed.

Glaser: But some big changes under the surface. The first one you wanted to highlight was in electronic spending.

Johnson: It's really amazing how important electronics have become to some of the consumption data. Right now, fully electronics account for about 25% of the year-over-year consumption growth. That's a huge number. I mentioned that consumption growth is about 2.7% and about 0.66% of that, about a quarter of it, comes from electronics, mainly TVs and personal computers.

Glaser: The second piece is where we're eating our meals.

Johnson: Absolutely. Again, the shift here is large. It may not sound to when I'm talking about little tenths of a number. But there are swings we really haven't seen before. Sales from grocery stores contributed 0.3% to the consumption number on a year-over-year basis, and that's about 11%, 12% of consumption. That's a type of number we've never seen before, contributing the growth of that level from grocery store sales, which is usually kind of just track populations. But we've had this big shift that's gone on and as prices of a grocery items have come down and in the meantime prices at restaurants, the leading competitor, have gone up because of higher labor costs. So, you've got this situation where it's been much cheaper to eat at home, and consumers are doing what an economist would project, they are eating at home more.

Glaser: What about healthcare?

Johnson: Healthcare is another area where we've seen some slowing. And what's happened there, it contributed about 0.7% to consumption a year ago, this year about 0.5%. So, that's a pretty dramatic swing. What's happened there in healthcare is that we don't have the big Affordable Care push any longer. I think what that's done has really taken the big bubble that we saw in healthcare spending and brought it back down again to a more normalized level. So, a big shift there as well.

Glaser: Finally, a growing area: financial services.

Johnson: Most consumers would say, well, I didn't spend any more on financial services. And certainly, some of the things are things that people don't pay directly may not even see. So, again, last year this contributed almost nothing to the growth in consumption, and this year, it contributed a very healthy 0.16%, so a very meaningful number there, but a lot of that's because of more assets under management, it was because there was--in financial services, it's also because your checking account now that interest rates have gone up that counts as more; spending, believe it or not, because your opportunity costs are greater. So, some things have happened that have really boosted that number that aren't going to make the consumers feel any richer or employ any more people.

Glaser: If we're seeing these shifts of where money is being spent, what do you think that could mean for the economy?

Johnson: I think it's a very, very interesting question and I think one of my worries here in the numbers is, if you look at the things that are doing well, the electronics and food at home, those are two categories that don't employ a lot of people, at least here in the U.S. And so, as those do well, it tends to not do so much for the jobs report. On the other hand, the things that are doing worse, the healthcare, for example, are very, very labor-intensive as are restaurants. So, those are two areas that are labor-intensive and they are doing less well. So, certainly, I would look for some relatively slow employment growth as we move forward because of this shift in where people are spending their money.

Glaser: Bob, thanks for a look under these numbers today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

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