WHAT’S SO BAD ABOUT GOODS?

Poetry and consumption are the most flattering of diseases. ~ William Shenstone 

 How’s your holiday shopping coming along? Beyond the holidays, have you been buying more goods or services than in the past? As I’ll discuss, some folks are concerned we consumers have been buying too many goods and not enough services. Goods are bad, services are better. The giant consumer segment of our economy is not in balance.

Even Pope Francis is concerned about consumption. He ended his visit to Greece several weeks ago by encouraging its young people to “follow your dreams and not be tempted by the consumerist ‘sirens’ of today that promise easy pleasures.” Those sirens are blowing a different tune of late.

Recently, polls indicate how we have felt increasingly uneasy about the economy. Family finances are in fairly decent shape for most people, due in part to the exceptional series of Covid-related government “economic impact payments” they’ve received since April 2020. The federal government has sent 478 million direct-cash payments to qualified recipients. Ninety-three percent (93%) of Americans have received these outlays.

Government-provided pandemic assistance extended to businesses as well as people. Government-funded, Covid-related business support was $753.8 billion in 2020, principally through the Paycheck Protection Program and the Restaurant Revitalization Fund.

Beginning in July, eligible parents have additionally received five (5) monthly child tax credit assistance checks. Remarkably, this aid – totaling about $90 billion (B) – has quickly reduced the national poverty rate by nearly 50%, compared to three (3) years ago.

Largely because of these support programs, 64% of respondents believed their personal finances were good in a recent poll, but incongruently only 35% described the national economy as good. Stored-up household savings from all these compensations may total $2 trillion (T), which is an impressively large sum. But all is not well.

According to insistent media proclamations by economic wizzes, we consumers are buying too many goods and not enough services with these unspent funds. I find these declarations a bit puzzling, as I’ll mention.

After a very long slumber, inflation has reared its costly head across the economy with consumer demand outstripping available supply. In November, the Consumer Price Index (CPI) increased 6.8%, the largest 12-month increase since June 1982.

Even the Federal Reserve Chair Jerome Powell finally succumbed to this economic reality by stating last week he would no longer call inflation “transitory.” He didn’t mention what he would be calling inflation now. I’d suggest “unfortunately augmented.” The CPI’s energy index rose a whopping 33.3% over the last 12 months, the food index increased 6.1%, which comes as no surprise to those of us who frequent gas stations and grocery stores.

Because of the Great Resignation, where workers are quitting their jobs in unexpectedly large numbers, businesses are offering higher wages and salaries to entice workers back. Over the past year, wages have increased 4.2%, almost a 50% rise compared to pre-Covid times.

How long will these inflationary trends last? No one knows, despite erudite claims to the contrary. What the Fed is going to do about this continuing, augmented inflation was partially revealed on December 15 when the Fed stated it would further reduce its expansionary policies for the economy “in light of inflation developments.” This means the Fed will likely increase interest rates several times next year. How much will the markets shudder at this key change in monetary policy? On Friday December 17, the S&P500 Index had lost just 1.89%, perhaps because the market’s expectations for a policy change have already been built into stock values.

The current, augmented level of inflation is due to three (3) factors: consumers’ growing demand for goods and services (especially goods), the fragility of some supply-chains to provide more goods and recently-elevated inflationary expectations.

This last item is the most problematic. Policy-makers have next to no control over how or why consumers hold such expectations or how they can influence them, short of implementing broad, contractionary economic policies. Such a policy reversal will not happen by Congress, which with the president dictates fiscal policy. The Dems would resist such policies as exceptionally fraught politically.

Senate majority leader Chuck Schumer has no interest in halting his troops from passing the now-reduced, but still extensive $1.85T Build Back Better (BBB) Act. That’s even though several months of full-court-press worthy efforts by the president and other Dems has yet to convince Sen. Manchin to put his name in the BBB’s yea column. The senator publicly stated on Dec. 19 he could not support the legislation, a change in the usual behind-closed-doors negotiations with the White House. Despite the media hurrah, I expect the negotiating isn’t dead yet, a bit like we saw for a while in Monty Python’s Life of Brian.

It’s ironic that the Dems have argued the far-reaching BBB expenditures will actually reduce inflation. A large upsurge in government spending, like the BBB Act, spreads more money throughout the economy, which raises business and consumer demand, and likely prices. Thus, federal economic policy to reduce inflation will be solely the Fed’s responsibility through its monetary policy mechanisms.

But back to goods. Personal consumption expenditures (PCE) have long been the nation’s single largest type of spending. Consumer purchases account for about 70% of our GDP. In contrast, government expenditures are just 17% of GDP, despite our being saturated with news of trillion-dollar legislative efforts. This is as true currently as it was a decade ago.

Our consumer purchases are placed into two (2) principal categories, goods expenditures and services expenditures. About 60% of our PCE are for services (everything from haircuts and restaurant meals to streaming service fees) and around 40% for goods (including furniture, jewelry, gasoline, rent and college tuition). These proportions haven’t changed much at all during the last year, as shown in the table.

Goods and Services Sectors Expenditures and Employment

Economic Sector	2021Q3	2020Q3	2011
Personal Goods expenditures (trillions $)	$5.524 (40.3%)*	$5.159 (40.2%)*	$3.331 (35.3%)*
Goods employment (millions of workers)	N.A.	20.022 (12.8%)**	18.244 (11.9%)**
Personal Services expenditures (trillions $)	$8.366 (61.0%)*	$7.815 (61.0%)*	$6.102 (64.7%)*
Services employment (millions of workers)	N.A.	122.774 (74.7%)**	114.652 (74.6%)**

*Percent of personal consumption expenditures (PCE). **Percent of total labor force. 

Personal consumer goods purchases have slightly increased during the past year, by $365B, which is a lot of money representing a 6.6% overall increase. Yet it’s only a one-tenth of one percent increase, as a proportion of PCE. From 2020Q3 to this year, services purchases have also increased, by $551B, a 6.6% increase from last year; but with no proportional change. During the last decade, as a proportion of PCE, goods expenditures have fallen by 5% relative to services. These diminutive changes have the wizzes concerned.

Consumers’ minor shift to purchasing goods recently has risen relative to services in no small part because of the pandemic’s restrictions. But the shift to goods expenditures is a very modest change, seemingly not worthy of much attention. However, I found the likely reason for all the interest.

The wizzes’ focus may not be on changes in expenditures, but on employment levels, also shown in the table. Our economy’s services sector employs a disproportionately larger number of people, relative to the goods sector. In 2020Q3 (latest year for data), 122.8 million people were employed in the services sector, far more than the 20 million in the goods sector. Services employment is 6x larger than the goods industries, and accounts for almost 75% of our total labor force. Intriguingly, services sector labor productivity (measured by output per employee) is much lower, just 45.3%, than the goods sector.

During the last 12 months, workers’ wages and salaries have risen higher than any time in more than 15 years. These increases reflect the labor market’s growing tightness. Goods-producing workers’ wages and salaries increased 3.5% on an annual basis. Service-providing workers’ wages and salaries increased 4.3% during the same period, among the highest of any sector.

During the pandemic, six (6) of the 13 services sector sub-industries, accounting for 74% of the sector’s total employment, have lost 2.8M employees as of November. The largest losses have been in leisure and hospitality – 90,000 restaurants have closed permanently during Covid – and government, especially local governments.

Despite the ever-lowering official unemployment rate, now 4.2%, the services sector’s loss of employees is a serious personal and  macroeconomic problem. Our low unemployment rate masks the ever-increasing number of workers who have dropped-out of the labor market, are no longer actively looking for jobs, and thus technically are not “unemployed.”

Santa’s bag filled with more goods and less services.

The rise of Omicron will only intensify simultaneous inflationary prices and dwindling labor availability. Covid keeps making services, like eating in restaurants and a host of other shared, public activities riskier. Even Santa’s becoming concerned. His bag of goodies will likely need to be enlarged, making his travels down chimneys that much more challenging.