Things Are Better Than We Think

March 5, 2015

Over at AEI, Mark Perry put together a chart that got a lot of attention yesterday. The chart shows that for the first time ever, Americans are spending more money at restaurants and bars than they spend at grocery stores. (For reference, the total numbers are $50 billion each, with the restaurants and bars now ahead by a nose.)

There are many things to say about this development. Mark Perry’s take focuses on the fast-paced pickup in recent months due to low gas prices and high consumer confidence:

The trend towards more spending eating out has been in place for at least several decades, but has accelerated in recent years and especially in recent months, likely due in part to falling gas prices as the WSJ article points out. The year-over-year increases in December 2014 (9.3%) and January 2015 (11.3%) for spending at restaurants were the two largest annual increases on record, which pushed restaurant spending in January above spending on groceries for the first time in history.

An 11.3% annualized growth in anything is a staggering pace, one surely indicative of huge changes in short-term conditions. The collapse of gas prices probably fits the bill.

The long-term trend, though – the trend in which bars and restaurants gain on grocery stores every year – is also worth mentioning, because I think it reveals something incredibly important.

Dining out is almost exclusively more expensive than the traditional grocery store. Yes, McDoubles are cheap, and some chic grocery stores are expensive, but that rule holds nine times out of ten. It’s true primarily because restaurants and bars offer two additional things (besides basic sustenance) that grocery stores often don’t. They provide prepared food on demand, and they do it in convenient locations. It takes additional labor and capital (and therefore, spending from the consumer) to make that convenience happen.

What this chart shows is that more Americans are willing to make that trade than ever before. Yes, my parents’ generation, like mine, had budget constraints. But that generation’s budget constraints really were worse than my generation’s. And one of the ways they made ends meet was to cut back on restaurant spending and prepare more food at home. Lots of people still have to do that, of course, but they have to do that less than they used to.

I think it’s an important point to make because we also often see pieces like this one at FiveThirtyEight: charts that show stagnation through inflation-adjusted economic data. The quality of analysis at FiveThirtyEight is generally strong, and the author, Ben Casselman, is thorough as usual, digging into important things like life cycle effects that are too-often ignored.

The problem is in the inflation adjustments themselves. I agree that growth in living standards has been slow, and I share some degree of pessimism about that. But they haven't been zero.

Inflation measures have to incorporate adjustments for quality. Here are the basics on quality adjustment in the CPI, for example. Those adjustments for quality are probably not strong enough.

No matter what is said about the path of “real” incomes, what is happening in real life is that Americans are buying higher quality goods; for example, they’re dining out more, not less. That’s an improvement in living standards worth celebrating.


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