Saturday, September 24, 2011

Retail despair as consumers spurn goods for services

There's a bumper sticker that says: if you think money doesn't buy happiness, you don't know where to shop. It's just a joke. But there's actually a bit of science in it. Research by psychologists says buying stuff doesn't bring us as much satisfaction as buying experiences - such as a holiday or even a restaurant meal.

Experiences are more satisfying than goods because they leave us with memories to think over (which we often enhance by forgetting the bad or boring bits) and give us something to talk about with our friends. And, after all, what are we but the sum of our experiences?

Experiences are services rather than goods and it's possible Australians are taking the psychologists' findings to heart because, as Dr Philip Lowe of the Reserve Bank pointed out in a speech to the Australian Economic Forum this week, consumers have been switching their spending towards services and away from goods.

The Bureau of Statistics' household expenditure survey shows that, over the quarter century since 1984, the proportion of household spending devoted to food felLby more than 3 percentage points to just 16.5 per cent.

The proportion devoted to clothing, footwear, household furniture and appliances fell from about 14 per cent to just over 8 per cent. Similarly, the share going to spending on alcohol and tobacco dropped by almost 1.5 percentage points to less than 4 per cent.

Over that period we're also spending smaller proportions of our budgets on cars and petrol and - get this - fuel and power, the latter of which now accounts for less than 3 per cent of the average household's budget.

But if we're devoting smaller shares to all those things, what things are getting bigger shares? Top of the list is housing, which is up from less than 13 per cent to 18 per cent. That includes people who are renting as well as people with mortgages and people who've paid off their mortgages.

We're also devoting higher proportions to spending on healthcare, education, household services (including childcare, cleaning, lawn mowing and gardening) and recreation (including audiovisual equipment, toys, sporting goods, pets and holidays).

As you see clearly from all that, we're devoting less of the consumer dollar to goods and more to services. While our politicians are giving speeches about the need for Australia to ''make things,'' we're busy making it a place that ''does things''.

This trend's been running for many moons but why? Long story. The first thing to remember is that just because we're devoting a smaller share of our budgets to food, clothing and footwear doesn't mean we're starving ourselves and running round barefoot and naked. It's not that we're spending any less on goods, it's that our spending on services has been growing faster than our spending on goods, thereby reducing goods' proportion of the total.

Part of the reason services' share is up is that the prices of services are rising faster than the prices of goods. That's because it's easier to increase the productivity of labour in the production of goods. People keep inventing ever-better labour-saving equipment, which allows the prices of manufactured goods to stay fairly stable or, in some cases, actually fall.

Many of the manufactured goods we buy are imported and the prices of imported manufactures are being kept low by various factors over the years: by increased competition from China and other Asian developing countries putting downward pressure on the world prices of many manufactures, by the phasing down of protection for domestic producers of clothing, footwear and cars, and lately by the higher dollar.

In marked contrast, services tend to be more labour-intensive, with less scope for better machines to increase the productivity of labour. Even so, real wage rates in the services sector tend to keep pace with the improvement in economy-wide productivity (most of which comes from the other sectors).

But though it's true we're spending more on services because their prices are rising faster, it's also true the quantity of services we're buying is rising faster than the quantity of goods we're buying. As real household income increases over time we have to spend the extra income on something, but there's a limit to how much more we can eat, how many clothes we can wear and cars and fridges we can use. By contrast, we're well short of the limit on the things we'd like to pay other people to do for us as we get more able to afford it. Enterprising businesses keep thinking of new things to do for people.

A ''superior good'' is one to which we devote a higher proportion of our spending as our income grows. And most superior goods are, in fact, services. Healthcare and education are superior goods, as is recreation and ''meals out'', as the bureau calls them.

But the glaring case in recent times is housing. Its share of our budgets has risen by more than 5 percentage points, with most of that occurring in the past decade. The reason is not higher mortgage interest rates - they go up and down - but higher house prices and bigger mortgages, thus leading to higher interest payments.

As an individual, you may think you had little choice but to pay the higher house prices. But what's true for the individual isn't true for the whole. House prices have risen so much because all of us bid them up in our (largely futile) efforts to use our higher disposable incomes to buy better housing.

That explains the long-term trend towards services and away from goods. But, as Lowe pointed out, over just the past year, the trend's become supercharged. According to the national accounts, real consumer spending over the year to June rose by 1.75 per cent for goods, but about 4 per cent for services.

Consumer spending on education services was up by 5 per cent, on hotels, cafes and restaurants by more than 6 per cent, on recreation and culture by 7 per cent, and on ''transportation services'' by 16 per cent. This last is mainly people taking cheap overseas holidays. (Other research shows that even people on lower incomes are spending more on holidays.)

So now you know why the retailers - who sell goods, not services - are doing it so tough but, despite widespread misapprehension, overall consumer spending is growing fine.