Torsten Slok of Apollo recently published a post on the rising share of U.S. consumer spending going toward mandatory categories (housing, health care and tuition), which leaves less money available for discretionary spending. I’ve made the same point, specifically about the rising share of spending on health care. His post in fact understates the problem.
He included spending on health care services in his analysis, but there are other categories of health care spending in the Bureau of Economic Analysis’ (BEA) breakdown of personal consumption expenditures (PCE)/consumer spending; the definition is on its Health Care website (link). For perspective, health care services accounts for 17% of PCE, while total health care spending accounts for 23% of PCE (and 17% of GDP). Just as important as the amount of health care spending is its direction of travel: it’s become a much larger share of PCE since the turn of the century, from 18% in 2000 to 23% as of 2Q25. No other major consumer spending category has grown as quickly over that period.
Two other points are worth making along these lines. One is that the growth in health care spending has been fueled to a significant extent by government transfer payment programs such as Medicare and Medicaid: those two programs alone account for nearly 50% of health care spending and 11% of PCE.
As mentioned earlier, health care spending accounted for 17% of GDP as of 2023, the most recent year for which the data is available. In 2000? Just 13%.
The outsized growth in (mandatory) health care spending is a problem by itself, but the story doesn’t end there. Over the past three years, the fastest-growing consumer spending categories—besides health care—have been…wait for it…housing and financial services and insurance. I’ve written at length about the seemingly never-ending U.S. “freight recession,” the result of ongoing weakness in goods demand; the chart below highlights why that’s been the case. The more money the average American is spending on mandatory items such as health care, housing, and financial services and insurance, the less money he/she has to spend elsewhere.
I’ve marveled at the rapid growth that the country’s largest supermarket chains (Walmart, Kroger and Albertsons, among others) are experiencing in their pharmacy/drug categories compared to all other categories, but perhaps I shouldn’t given this data. In its most recent fiscal year, 35% of Walmart U.S.’s sales growth by merchandise category came from its “health and wellness” category (which includes pharmacy, OTC drugs and other medical products and services), even though that category only accounted for 13.5% of sales. The numbers for Albertsons are even more striking: 86.5% of its sales growth ex-fuel in 2024 came from its pharmacy business, even though pharmacy only accounted for 12% of sales.
Should it come as any surprise, then, that all manner of consumer packaged goods (CPG) companies, non-drug retailers, restaurant chains, and most recently travel companies (airlines and hotel chains) are experiencing increasingly weak sales/volume trends (link)? Discretionary spending categories are under varying degrees of pressure, and the pressure appears to be intensifying with each passing month. As Bloomberg reported earlier this week (link), the share of consumer debt in serious delinquency rose in the second quarter to the highest level since early 2020 owing to the resumption of student loan payments. And as the cost of many goods goes up owing to tariffs (President Trump’s new tariffs went into effect today), discretionary spending will be further pressured.