What Health Care Spending Means for Consumer Goods

The impact of the Great Recession of 2008/2009 is different than it appears just looking at total spending.

From total spending alone, the conclusion might be that while the spike in consumer spending associated bubble will fall back, the new trend line will still be robust.  In other words, there was a bubble in binging, so the bust, when it finally settles out, will be nothing worse than a return to normal.

This is a misreading of the bubble.

As two recent analyses have shown, the boom in consumer spending during the 1990s and 2000s was not the result of binging on consumer goods.  Instead, it was due to skyrocketing health care costs, primarily in the form of insurance premiums.

What these two economic analyses show is that spending on consumer goods has been relatively constant for decades.  Maybe such spending would have been stronger if not for rising health care costs, but the squeeze on spending created by the recession is not wringing out waste.  Rather, it is cutting into essentials.

Published online in August 2009, these two analyses dissected the components of the spending boom.  As can be seen below in a key chart from each, health care spending was the reason for the overall increase in spending. 

See this chart from a post on the News N Economics blog, August 19, 2009:

And see this chart from an article in the Left Business Observer, August 2009:

 As the Left Wing Observer noted:

“Medical spending accounted for almost a third of that rise [in consumer spending] between 1997 and 2008.  Energy accounted for another third.  Spending on goods accounted for just 3% of the rise, or 0.1 point.  In other words, the familiar story that Americans went hog wild buying all kinds of stuff is wrong.”

Not only does the spending rate need to be reassessed and refigured to account for health care spending, so does the saving rate.  The Left Wing Observer again:

“Graphed below is the personal savings rate as reported along with how it would look had the medical bite out of after-tax income remained constant at 1991’s rate over the last 18 years.  The bottom line: it would have declined much less dramatically into its 2005-6 lows, and would since have risen back to 1992 levels.”

Few analyses of consumer spending account for health care spending.  Prognostications of where consumer spending is headed as the recovery takes hold must be properly calibrated.  Three implications jump out.

First, recessionary pressures on consumer spending are more severe than total spending numbers suggest.  Spending on consumer goods was not abnormally high during the boom, thus there is little fat to cut during the bust.  The reduction in consumer spending due to the recession will precipitate some fundamental challenges for many brands.

Second, prioritization will be the driving dynamic of consumer behavior for the near future.  This is one of the five key elements of the new value equation discussed in A Darwinian Gale.  Once health care spending is factored out of total spending, it is apparent that consumers have little cushion in their finances.  Obviously, they can’t keep buying as much as before, but they won’t be able to buy a little bit of everything either.  Something has to give.  Priorities have to be set.  As discussed in detail in the Gale, this requires that a reworking of marketing objectives, a shift in research methods and a profound change in the character and scope of competition.

Third, one hopeful benefit of health care reform will be a boost to consumer spending.  This has not been discussed during the debate over health care, but reining in the costs of medical care such as insurance premiums will put more money in the hands of consumers.  They can then spend more on other things.  This could well be the kind of jumpstart needed in the consumer economy.

While the impact of health care reform on consumer spending has received no attention in the U.S. health care debate, it is not an unknown tactic for stimulating spending.  For example, one of the stated objectives of the health care reform introduced by the Chinese government early last year was freeing up consumer spending.  One of the primary reasons why Chinese consumers have historically spent so little is that individual savings have been their only means of covering health care expenses.  Last year, with the global in meltdown and Chinese exports in decline, the Chinese government stepped in to bolster its economy with a couple of aggressive fiscal stimulus programs.  Freeing up savings through government-run, publicly-funded health care was one major initiative.  As USA Today described it, “The new health care system could free the Chinese to spend more on goods instead of saving for future medical care.”

Thinking of your brand competing for share of wallet with health care spending is not a common way of doing business planning.  But as economic analyses show, this is, in fact, the competitive context for all consumer goods, the implications of which matter a lot in figuring out how to ride the recovery into renewed growth and success.

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