Sluggish spending for services slows economic growth

  • Updated: December 14, 2013 - 7:18 PM
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Daymn Johnson expanded his barbershop business with a $30,000 microloan from the Neighborhood Development Center in St. Paul. Consumer spending on services — everything from rents and water bills to health care and haircuts — is a laggard as the economy has recovered from the Great Recession.

Photo: Brian Peterson, Star Tribune

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The U.S. economy is suffering a service interruption.

Consumer spending on services — everything from rents and water bills to health care and haircuts — is a laggard as the economy has recovered from the Great Recession. Such expenditures, adjusted for inflation, have risen 6.3 percent since mid-2009, compared with a 34 percent surge in outlays on durable goods such as automobiles and appliances, according to federal data.

Slow services spending is “the culprit behind sluggish growth” of the economy, said Carl ­Riccadonna, senior U.S. economist at Deutsche Bank Securities Inc. in New York.

Outlays have been held back by a slowdown in new household formation and meager wage growth. As young adults stay home with their parents rather than forging out on their own, spending on utilities and amenities such as cable television has languished.

Purchases of durable goods have been quicker to recover. Some of the growth is driven by record-low interest rates. Another contributor is pent-up demand for replacement of aging household goods such as appliances and furniture. Neither force has much effect on purchases of services.

A turnaround in outlays for services is key to the economy breaking free of the roughly 2 percent growth rut it’s been stuck in over the past 4 ½ years and achieving what economists call escape velocity. Personal consumption of services accounted for 45.4 percent of the country’s $16.2 trillion gross domestic product last year, down from 46.1 percent in 2009.

“If service spending starts to normalize, many economists are going to be very much surprised on the upside” by growth next year, said Neil Dutta, head of U.S. economics at Renaissance Macro Research.

Dutta sees GDP rising 3 percent in 2014, faster than the median forecast of 2.6 percent in a Bloomberg poll of 74 economists conducted Dec. 6-11.

Bloomberg News

 

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