18 March 2018

Basic Costs Squeeze Families

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The American middle class has absorbed a steep increase in the cost of health care and other necessities as incomes have stagnated over the past half-decade, a squeeze that has forced families to cut back spending on everything from clothing to restaurants. Health-care spending by middle-income Americans rose 24% between 2007 and 2013, driven by an even larger rise in the cost of buying health insurance, according to a Wall Street Journal analysis of detailed consumer-spending data from the Bureau of Labor Statistics.

That hit has been accompanied by increases in spending on other necessities, including food eaten at home, rent and education, as well as the soaring cost of staying connected digitally via cellphones and home Internet service. With income growth sluggish, discretionary spending on things like clothing and movies, live shows and amusement parks has given way.

The data—drawn from 14,000 households that either keep diaries on their spending for two weeks or agree to quarterly interviews—helps explain why so many retailers are turning in persistently lackluster results, and why the household-products business has shown virtually no growth for years. It also helps illuminate why the consumer-led U.S. economy has been so slow to rebound from the financial crisis.

The rise in health-care spending preceded the Affordable Care Act’s requirement that most Americans have health coverage and that insurance companies cover existing conditions, both of which kicked in this year. The impact of other parts of the overhaul, like the requirement that family insurance policies include children up to the age of 26, isn’t clear.

Consumer spending continues to make up just over two-thirds of the U.S. economy. But where households spend that money has shifted significantly. To see how it has moved, the Journal analyzed Labor Department data on 2013 out-of-pocket spending for the middle 60% of the population by income—households earning between about $18,000 and $95,000 a year, before taxes.

The data show they are losing ground. Overall spending for the group rose by about 2.3% over the six-year period from 2007, even as inflation totaled about 12%. At the same time, income for the group stagnated, rising less than half a percent.

With health care and other costs rising, these consumers spent less on furniture, entertainment, clothing and even child care, the Journal analysis found. This year, overall health-care spending is expected to continue growing at a modest pace, but government projections suggest U.S. households may spend slightly less, as more people obtain insurance, premium subsidies or Medicaid coverage.

Spending on mobile-phone service, meanwhile, has soared, rising nearly 50% since 2007, the year the iPhone came out and data plans became more commonplace. Similarly, spending on home Internet service has soared by more than 80%.

To make up the difference, middle income Americans have cut costs where they can. Spending on event admission and fees has fallen 16.5%, while spending for a broad category that includes boats, motor-homes, cameras and party rentals has fallen 31%.

Together, food, housing and health care accounted for about 56% of consumer spending for middle-income Americans, up from 54% in 2007. Transportation, which accounted for another 19% of the total, was largely flat during the period, as Americans spent less on auto-loan interest and new car payments, but more on gasoline.

Click here to access the full article on The Wall Street Journal. 

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