Basic Costs Squeeze Families
Health Care, Cellphones Eat Up Income, Leaving Less for Things Like Movies, Clothes
Middle-income Americans’ spending on mobile phone service has soared, rising nearly 50% since 2007, the year the iPhone came out and data plans became more commonplace. Bloomberg News
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.
WSJ's Ryan Knutson joins the News Hub to discuss why the rising cost of health-care and other necessities is leading to a slowdown in leisure spending. Photo: Getty.
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.
Michael Peters, who owns the four-store Carpet Plus chain in Wisconsin, and his wife just began paying more than $900 a month for their health insurance. That’s about 40% more than what they paid six years ago even though his company plan increased their deductible and dropped ambulance coverage to save money. His wife’s cataract surgery in August cost the couple $1,700 out of pocket. In 2007, when she had the operation on her other eye, the couple was on the hook for just $189.
“Same procedure, same doctor, same wife,” said Mr. Peters, who lives near Madison. The couple now eats out at Panera Bread instead of “tablecloth restaurants,” stopped buying season tickets at Madison’s Overture Center for the Arts and dropped their indoor club seats for University of Wisconsin football games.
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.
“Part of the story is that your income growth is slowing,” said Steven Fazzari, an economist and chairman of the sociology department at Washington University in St. Louis. “They’re spending more on necessities, cutting back on other types.”
‘Because the Verizon bill is so expensive, and because it changes month to month, you have to cut back....I can’t tell you the last time I went out to a movie.’
The overall cost of health care rose by 21% between 2007 and 2013, according to separate data from the federal Centers for Medicare and Medicaid Services. And employees paid more for workplace insurance, averaging $380 a month for family coverage in 2013, up 39% from 2007, data from the Kaiser Family Foundation shows.
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.
In Kansas City, Mo., Dawn Miller said her family’s cellphone bill has grown from $35 a month years ago to more than $350 some months today, depending on whether someone in the family blows past their plan’s monthly data limit.
“Because the Verizon bill is so expensive, and because it changes month to month, you have to cut back,” said Ms. Miller, a police dispatcher.
Two months ago, she and her husband postponed an anniversary dinner after their Verizon bill eclipsed $500. “I can’t tell you the last time I went out to a movie,” she said.
Similarly, spending on home Internet service has soared by more than 80%. Last year, it made up about 0.8% of spending for middle income households, up from 0.4% six years earlier. Despite talk of “cord cutting,” spending on cable and satellite television is still up 24% from 2007.
Spending on housing was up just 2.4%. But that masked big declines in spending on home purchases and mortgage interest, reflecting lower levels of homeownership and low interest rates. Spending on rent soared 26%, as some families lost their homes and rising demand for apartments helped push up monthly rents.
Restaurant spending fell slightly, while outlays on food eaten at home rose 12.5%.
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%.
Spending on household textiles, including bath and bed linens, has fallen 26.5%. Spending on care for children and the elderly has fallen 25%.
Aileen Reve, a day-care center worker on New York’s Long Island, said she has noticed parents cutting back on hours, often by telecommuting or juggling their job schedules.
“They work a couple of days at home,” and keep an eye on the children while they do, Ms. Reve said.
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.
A variety of factors can affect spending in a category. The 6.5% decline in spending on new cars and trucks, for example, likely reflects a combination of delayed car purchases as well as a shift to less expensive vehicles, or even used ones, for which spending is up 2%. Lower apparel spending—down 11.5% overall, but down 18% for women 16 years old and over—likely reflects a combination of fewer clothing purchases and a preference for less expensive clothes, as well as aggressive discounting by retailers jockeying for business.
Spending on electricity is up 11% since 2007, according to the Labor Department data.
Luise Fortney, a U.S. Defense Department auditor in suburban Baltimore, says she buys less clothing, jewelry and shoes—or travels to a Delaware outlet mall to find bargains—and has stopped collecting Longaberger baskets, in part due to higher electric bills.
“I buy less stuff for myself,” she said. “We’ve cut a lot out—a lot of extras you used to get, so you can afford food and the electric. And you’re trying to save for retirement.”
