Consumers shift from services to goods
admin | December 4, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The US consumer has recovered much faster and more forcefully than generally expected when the economy locked down in the early days of the pandemic. Thanks in part to the generosity of the CARES Act, the overall level of consumer spending approached pre-pandemic levels by October. The composition, however, shows the imprint left by the virus as spending has shifted away from services that are either unavailable or less desirable than before the pandemic and toward goods.
Changes in consumer spending
The economic impact of the spring lockdowns and the progress of the subsequent recovery shows up well by comparing the ground lost in March and April to the rebound since April. With October data in hand, the picture is clear (Exhibit 1). Overall spending has rebounded to within a few percentage points of February levels, but not all sectors are equal.
Exhibit 1: Consumer spending and the pandemic
Broadly, both goods and services spending fell during the lockdowns with only a few exceptions, most notably food and drink. In fact, the declines were pretty similar—15% for goods and 20% for services.
By October, overall spending had recovered to within 1.5% of the February level. Goods expenditures had easily exceeded the February level, with broad-based strength. The main exceptions were apparel and gasoline, both victims of the shift toward working from home.
Meanwhile, October services spending was more of a mixed bag. Overall, the pace of outlays was a little more than 5% behind the pre-pandemic level. Some areas made near complete recoveries, including health care and gambling. On a comparative basis, restaurants have performed surprisingly well, climbing back to within 10% of the pre-pandemic level. Some areas that had not seen an especially deep dip nonetheless have failed to recover much, including education and professional services. Areas that were especially damaged by the lockdowns, such as hotels, public transportation, recreational services, and personal care and clothing services—hair and nail salons and dry cleaners, for example—have made sharp improvements but remain far below the pre-pandemic norm, and in may cases have little hope of fully recovering until the pandemic is over.
Shortfalls in dollar terms
A different way of considering the same data is to tally the composition in dollar terms of the swings in spending. Overall consumer spending is down $233 billion annualized from February to October, with goods outlays up $357 billion and services spending down $590 billion.
Of that $590 billion, the biggest chunks come in the sectors that might be expected. Restaurants are down $86 billion, personal care services account for $74 billion, hotels for $66 billion, spectator events including movie theaters for $61 billion, air travel for $40 billion, amusement parks for $36 billion, education services—mostly higher education—for $35 billion and child care for $21 billion. These eight categories account for $419 billion, about 70% of the decline in services spending and almost twice the overall fall in expenditures.
For most of these services, demand will return to normal in short order once the pandemic is over. In the meantime, households have reallocated their budgets, spending more on a variety of goods, including motor vehicles and household furnishings, until they are able to travel, go out to eat and so on.
In the end, however, household spending will be determined mostly by income, and personal income continues to run well ahead of pre-pandemic levels in the aggregate, as government transfer payments have more than offset the loss in wage and salary income. The fact that spending has recovered to within striking distance of the pre-pandemic level in just six months after the lockdowns began easing speaks to the resilience of the consumer. Going forward, the intensity of the virus will certainly have some impact on the level of spending, but it may mostly affect the composition, as the worse the virus gets and the more new restrictions are imposed, households will spend more on goods and less on services, all else equal.
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