What makes the U.S. economy grow? A look at consumer spending data offers a simple if perhaps troubling answer: Increasingly, it's people buying stuff they don't need.
Any effort to separate wants from needs involves subjectivity. One person's luxury may be another's necessity. That said, some categories of spending tracked by the Bureau of Economic Analysis – such as jewelry and restaurants – consist primarily of stuff that pretty much anyone, if pressed, could do without. Such goods and services make up almost a fifth of personal consumption, or an annualized $2.3 trillion in the three months through September.
For most of the past six decades, this non-essential consumption played a secondary role in economic expansions, with spending on more important items such as groceries and shelter taking the lead. In the new millennium, though, the roles have switched. Since the current recovery began in mid-2009, spending on stuff people don't need has grown at an average annualized rate of 3.3 percent (adjusted for inflation), compared with 2 percent for other stuff.
The increasing importance of non-essential spending has various possible interpretations. On the bright side, it could be a sign of greater overall prosperity: If people have largely taken care of their basic needs, then the ups and downs of consumption might simply be migrating to discretionary items.
Alternatively, it could reflect the increasing concentration of wealth in the hands of the rich, who naturally devote a larger share of their expenditures to luxury goods and services. Perhaps their spending is driving faster growth in non-essential goods during recoveries.
Whatever the explanation, the message for a fragile global economy is the same: If you want it to keep growing, you'd better hope Americans keep buying stuff they don't need.