Article

April 2014

Explaining the 30-year shift in consumer expenditures from commodities to services, 1982–2012

Over the last 30 years, consumer expenditures in the United States have shifted from commodities to services. This article uses Consumer Price Index (CPI) and Consumer Expenditure Survey (CE) data to examine the key drivers of that shift. CPI and CE data show that the compositional change in consumer expenditures has been driven by a considerable increase in the quantity of owner-occupied shelter.

The last 30 years have seen a shift in the allocation of U.S. consumer expenditures from commodities to services. This article uses Consumer Expenditure Survey (CE) data and Consumer Price Index (CPI) “relative importance” and index data (1) to show that the shift has been driven by changes not only in price but also in quantity1 and (2) to identify the particular categories of services driving the overall shift to services consumption. Focusing on absolute changes in per-household expenditures during the period 1984–2011, the article finds a 9.1-percent increase in the quantity of services and no change in the quantity of commodities. This trend has been driven largely by a considerable increase in owner-occupied shelter. The article also finds that the quantity of health care services has decreased, although the share of personal consumption expenditures (PCE) accounted for by health care services, as measured from 1959 to 2009 by the U.S. Bureau of Economic Analysis (BEA), has increased. This difference illustrates that PCE data account for third-party expenditures, while CPI and CE data do not.2 Within commodities, the quantity of durable goods has increased, while the quantity of nondurables has decreased.

Focusing on relative changes in total expenditures for the 30-year period from December 1982 to December 2012, the analysis yields the same general result. There has been an increase in the total quantity of services at the expense of commodities—a shift primarily due to an increase in the quantity of shelter, in particular owner-occupied shelter. There has also been a considerable increase in the quantity of “other services” (a residual category not including shelter, transportation services, medical care services, and energy services), when “other services” are compared with commodities. Moreover, the decrease in the quantity of medical care services does not mean that consumers have consumed less medical care services; rather, it means that third-party expenditures have increased while out-of-pocket expenditures have decreased.

In short, CPI and CE data show that the shift to a services-based economy entails more shelter, while PCE data indicate that the shift is also driven by increases in expenditures on health care services. Within commodities, there has been an increase in the quantity of durables and a decrease in the quantity of nondurables.

Background

In 1968, economist Victor Fuchs observed that more than half of the employed population in the United States was working in the services sector and thus was “not involved in the production of food, clothing, houses, automobiles, or other tangible goods.”3 The U.S. economy, he argued, had become a “service economy.”

Fuchs’s analysis identified a fundamental change on the production side of the U.S. economy, a change in which the services sector had captured an increasing share of overall employment in the United States. But a similar shift was also occurring on the consumption side of the U.S. economy, with consumers allocating an increasing share of total expenditures to services and a decreasing share to commodities. This change was already underway at the time of Fuchs’s writing, and since then, the U.S. economy has not looked back.4

Notes

1 When discussing changes in quantity, this article refers to a residual between changes in expenditures and changes in price. In this interpretation, consumers buy “more” or “less” of a category of commodity or service, depending on whether the change in quantity is positive or negative.

2 The CPI program defines an index and expenditure category for “medical care services.” The CE program defines an expenditure category for “health care services.” The PCE program defines an index and expenditure category for “health care services.” The CE expenditure category and the CPI index and expenditure category “consist only of those services directly purchased by consumers.” The PCE index and expenditure category “include those services directly purchased by consumers and those services paid for on behalf of consumers.” See Clinton P. McCully, Brian C. Moyer, and Kenneth J. Stewart, “A reconciliation between the Consumer Price Index and the Personal Consumption Expenditures price index” (U.S. Bureau of Economic Analysis and U.S. Bureau of Labor Statistics, September 2007), p. 12, http://www.bea.gov/papers/pdf/cpi_pce.pdf. This article treats “medical care services” and “health care services” as conceptually the same thing.

3 Victor R. Fuchs, assisted by Irving F. Leveson, “The service economy” (UMI, 1968), p. 1, http://www.nber.org/chapters/c1155.pdf.

4 The shift from goods to services has probably been greater and swifter on the production side because of the tremendous growth in imported goods.

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About the Author

Jonathan D. Church
church.jonathan@bls.gov

Jonathan D. Church is an economist in the Office of Prices and Living Conditions, U.S. Bureau of Labor Statistics.