Weekly Economic Report: Personal Income and Consumer Spending, Part 2

by Wyoming Liberty Group Staff

With the reported change in personal income in Wyoming, from work-based to equity-based and sourced from entitlements, it is valid to ask what the implications are for consumer spending.

Main finding: Consumer spending is relatively weak. Basic necessities, including insurance take up a larger share of consumer spending than nationally. With health insurance market reform, Wyoming families could potentially save $800 million per year.

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Last week's Report explained that work-based earnings have declined as share of personal income in Wyoming. It also reported a larger-than-national decline in net earnings by residence. Together, these two numbers suggest a statewide erosion of middle-class income.

This week's Report compares the findings on personal income to data on consumer spending. Nationwide, over time consumer spending accounts for approximately two thirds of GDP. The share is notably lower in Wyoming, and as Figure 1 reports it is also more volatile:

Figure 1

Source of raw data: Bureau of Economic Analysis

The share of consumer spending in the Wyoming economy is unusually low, with only one other state having experienced a share below 50 percent.* The decline in the consumer-spending share was initially associated with strong growth in other components of GDP, ostensibly exports. However, as the rapid growth in export values was abruptly reversed in 2009, the consumer spending share grew only slowly.

By 2016 the GDP share of consumption had just about returned to where it was prior to the coal export boom and the Great Recession. In 2017 it was at 63.2 percent, five percentage points below the national average.

Total consumer spending is growing more slowly in Wyoming than in the country as a whole. In the past five years consumers have increased their spending in Wyoming by an average of 2.3 percent per year in current prices, compared to 3.9 percent per year in the U.S. as a whole. (The relevance of using current-price data is explained in the Implications section below.) A breakdown of consumer spending in Table 1 points to an even more pronounced difference.

Table 1

Source of raw data: Bureau of Economic Analysis

National consumer spending outgrows Wyoming consumer spending in almost every category. Notable exceptions are food and beverages for off-premises consumption – patronage of restaurants including fast food establishment – and housing and utilities. While it is not possible to immediately separate housing from utilities, it is likely that the stronger growth in this category is related to utility prices. However, a closer examination for conclusive evidence is warranted.

The lag in the growth of consumer spending in Wyoming is relatable to a slow decline of consumer spending as share of personal income. As last week's Report explained, Wyoming has the lowest ratio of consumer spending to disposable income. Looking at unadjusted personal income – which allows for a comparison that takes into account all changes to the variable – Wtoming has seen a slow decline in consumption. Given that equity-based earnings have increased as share of personal income, and that the propensity to consume is lower out of high-end income, the relative decline in consumer spending is expectable.

At the other end of personal income, entitlements have grown in importance with retirement and disability benefits higher than the national average. However, entitlements generally have increased, with a weak but noticeable effect on consumer spending. Basic items, such as groceries (food and beverages for off-premises consumption), clothes, gasoline, housing, utilities, health care, transportation and insurance, have increased as share of Wyoming household expenses:

• From 1997 to 2007, basic items accounted for an average of 60.4 percent of Wyoming consumer spending, compared to 58.3 percent nationwide;
• Since 2007 the basic-items share has slowly grown in Wyoming, reaching 64 percent in 2017; the U.S. share has remained steady in the 59-60 percent bracket.

Implications of the findings

The trends visible in consumer spending in Wyoming confirm what other variables indicate, namely a stratification of income and household finances. On the one hand, well-to-do consumers remain resilient; on the other hand, there has been an increase in household dependency on tax-funded entitlements. In between, the erosion of the middle class appears to be continuing.

Weakness in consumer spending is an argument against any tax reform that would broaden the sales tax to services. As reported in Table 1, growth in services consumption is already below the national average, with only housing and utilities performing better. To this point, the growth in the share of consumer spending that goes toward basic items should be strongly discouraging for any tax reforms that place a higher burden on consumers.

It is also important to note that the increase in spending on basic needs is primarily driven by a substantial increase in expenses for finance and insurance services. With the caveat that more detailed data is needed, a preliminary conclusion is that this increase is driven by private expenses for health insurance. This could be countered by reforms to our state's health insurance market that allowed for interstate purchases of health insurance plans.

If the insurance share of consumer spending in Wyoming had been at the national average, families in our state would have had an additional $881 million in their pockets in 2017 alone. In other words, there is a substantial improvement of our state's economy to be had from insurance-market reforms.

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*) The Bureau of Economic Analysis reports relevant raw data back to 1997. The District of Columbia consistently has a share below 35 percent. However, given the status of the D.C. and the fact that it consists entirely of a small urban area in a large metropolitan region, it should be treated as a special case.