When people think about what an economy produces, they tend to think in terms of solid objects: cars, appliances, clothes, houses, food. But US consumers are in the midst of a long-term shift away from consuming goods and toward consuming services. Here’s an illustrative figure from the Congressional Budget Office (The Budget and Economic Outlook: 2024 to 2034, February 2024).
Here are a few ruminations:
1) The decline is fairly rapid, from 36% of consumer spending going to goods in 2000 to only about 30% at present–and if the CBO projections are to be believed, a continuing trend for the next decade.
2) The US economy is not mostly composed of material objects. It’s much more services than goods.
3) In practical terms, what does this shift mean? Major categories of services include health care, education, entertainment and tourism, finance, and the like. As my wife and I have paid college tuition bills for multiple children over the years, we say that it’s the equivalent of buying a very nice car and driving it off a cliff each year. But we choose the college tuition, although our cars are more than a decade old. More generally, we try to choose (without being in any way extreme about it) to consume experiences rather than to accumulate stuff.
4) The distinction between goods and services remains meaningful: for example, issues of production, supply chains, and how they are provided to ultimate consumers are systematically different. But it’s also worth remembering that even within the category of “goods,” there are a lot of embedded services. When someone buys a car or a smartphone or a pair of jeans or a cart full of groceries, the physical objects they are buying include a substantial dose of underlying service activities like research, design, marketing, finance, management, and transportation. In that sense, the fact that services are 70% of consumption surely underestimates their importance in an high-income economy.
