With the US economy slowly returning to prepandemic levels, consumer spending is likely to get a shot in the arm as consumers eagerly spend on activities that had screeched to a halt during the COVID-19 pandemic.
In 2019, a year before COVID-19 changed our world, consumers in the United States spent close to US$10 trillion1 on a swathe of services. Then, in 2020, faced with a formidable and unseen biological enemy that spread across the country through touch and aerosols, people withdrew indoors. Hitting the gym, grabbing a drink at the local pub, and hailing a cab—until then hallmarks of daily life—suddenly turned into a game of Russian roulette. As homes turned into offices and wider economic activity slowed, consumer spending suffered, and spending patterns suddenly changed. Travel, transportation, and restaurant spending were suddenly out of favor. Instead, people stockpiled food and other essentials, and spent more on home gyms, furnishings, and utilities.
This year, the despair of 2020 is giving way to hope. New virus cases have declined by 95% since the peak of January 8, while vaccinations have increased.2 Vaccines are now available even for children aged 12 years and over.3 It is likely that by the end of this year, the country will inch closer to what it was before the pandemic. With it, consumer spending and the wider economy will likely get stronger. Services is set for a strong rebound as people travel more, attend sporting events, go out shopping like they did in 2019, and return in troves to restaurants and pubs. Spending on durable goods is, however, expected to be moderate. After all, there’s a limit to the amount of gym equipment and furnishings one can buy. Yet the future of consumer spending will also depend on the nature of postpandemic life. Remote and hybrid work—a mix of in-person and remote, for example—may induce permanent changes in the way Americans work, live, and spend.4
Fear of COVID-19, social distancing measures, and outright closures enforced locally at various times in 2020 resulted in a tangible shift in the amount and nature of consumer spending. Real personal consumption expenditure (PCE)5 fell in 2020 as options for spending declined and the economic impact of the pandemic cut into people’s wallets. Savings too increased last year as even employed people held back on spending amid economic and health-related uncertainty. According to Deloitte State of the Consumer Tracker, a global survey of consumers, concern about personal well-being and that of friends and family members was the highest in April 2020 and in the last quarter of the year when new virus cases increased sharply.6 The personal savings rate ended 2020 at 14.2%, nearly double of what it was in December 2019.
With all these factors weighing on consumers, PCE contracted 3.9% last year compared to a 2.4% expansion in 2019. The pace of decline was the harshest in April 2020 (figure 1). And it is only in March this year that spending surpassed the prepandemic level of February 2020. Figure 1 also reveals that goods purchases benefitted during the pandemic, while services fell sharply. No wonder then, that, in 2020, the share of services in nominal PCE fell, while that of both durable and nondurable goods went up by nearly a percentage point each (figure 2).
Fears of the virus and social distancing meant that consumers avoided places where the possibility of crowding or sharing space with those who are not part of their families is high. Deloitte’s survey of consumers reveals that between April and May 2020, only 23% respondents7 felt safe taking a flight while just 29% felt safe staying at a hotel. And although the figures increased slightly through the year, the rise wasn’t much. The survey also reveals that most consumers remained wary of visiting food services places and attending in-person events (figure 3).
Consequently, certain forms of services spending suffered deeply. PCE on recreation services fell by 31.8% last year, while spending on food services and accommodation dipped 21.8%. People also avoided communal travel such as public transport, taxis, and airplanes—total ridership in public transportation fell by 50% in the first three quarters of 2020 compared to the same period a year before.8 Consumer spending on transportation therefore fell sharply last year (figure 4). Spending on housing and utilities services, however, maintained a steady growth as people preferred to stay indoors and many worked out of their home offices.
Among durable goods, the biggest surge in spending was on recreational goods and vehicles (18%) as people opted to set up their home gyms rather than step out for workouts. Figure 4 also reveals that the need to set up or augment home offices meant an increase in spending on furnishings and other durable household equipment in 2020. Within nondurable goods, spending on food and beverages grew by 6.9%, up from the previous year’s 1.7% rise—the pandemic not only made people stock up on groceries but fewer visits to restaurants meant more cooking at home.
Vaccinations have changed the game over the last few months, turning anxiety that persisted in 2020 into a sizeable ray of hope. As of June 4, 41.4% of Americans are fully vaccinated, while another 9.7% have received their first of two doses of a vaccine. With vaccinations rising, daily virus cases and deaths due to COVID-19 have gone down, which, in turn, has reduced anxiety and concerns about health.9 In Deloitte’s latest survey in end-May, 48% of consumers were concerned about their health and well-being, one of the lowest figures since the survey started in April last year.
With lessening anxiety has come a change in mood: Americans are eager to get back to meeting each other, head to their favorite restaurants and pubs, go for vacations (figure 5), and return to their offices. For example, in Deloitte’s latest survey, 68% of respondents said that they feel safe to return to their workplaces, the highest figure since the survey started.
Services spending has started to benefit as health-related concerns ease. In March, PCE on services grew year over year for the first time in 13 months and rose 19.3% in April, although part of the surge that month is due to a low base in 2020. Spending on services, however, is still 4.7% lower than what it was in February 2020 (before the pandemic) compared to strong growth in spending on durable goods (30.8%) and nondurable goods (9%) during this period.
With fears of the virus declining due to rising vaccinations, it is likely that the country could edge back to the prepandemic normal by the end of this year. As businesses offering consumer services ramp up after more than a year’s struggle with the virus, labor market woes will ease further. Employment has been recovering after the staggering 14.3% drop in April 2020, with job gains averaging about 1% per month in the 13 months since then. With the economy expected to gather momentum, the labor market will continue to benefit as it tries to inch back toward prepandemic levels—employment in May was still 4.5% less than what it was in February 2020, a month before the pandemic hit. Many consumers may also have a large amount of savings to deploy as economic and health scenarios improve further. We calculate that consumers saved about US$1.6 trillion more than what they would have saved had there been no pandemic.
Cheerful as the forecasts seem, especially relative to 2020, consumer spending faces key headwinds. First, the labor market is not yet out of the woods with employment far short of prepandemic levels. There were 7.1 million fewer people working in the economy in May this year compared to February 2020. And labor force participation at 61.6% is close to two percentage points lower than prepandemic levels. Without these people coming back to the labor market and finding jobs, consumer spending growth may suffer over the medium to long term.
Second, low-income households will face challenges in ramping up spending given the pandemic’s disproportionate impact on them.11 As of May 2021, employment in low-wage occupations12 was still 5.4% lower than that in February 2020, worse than the declines in medium-wage occupations (4.2%) and high-wage (2%) ones.13 Low-income households are also less likely to have health insurance—especially after layoffs—and more likely to have health conditions that complicate recovery from infection.
Third, spending by retirees will come under pressure as retirement income falls due to low interest rates. Retirement savings, an indicator of future spending by retirees, has been hit due to the impact of the pandemic on labor markets and is unlikely to recover fast if the participation rate does not return to prepandemic levels soon. Even before the pandemic, fewer than four in 10 nonretired adults thought their retirement was on track, with one-quarter of nonretired adults saying they have no retirement savings.14 And the great majority of Americans’ balance sheets have not benefitted from the recent stock market boom.15
That the impact of the pandemic on people’s incomes and finances is deep and continuing is evident from latest trends in Deloitte’s consumer survey, which shows that the share of respondents attributing their anxiety to financial stress has been edging up since January. In fact, in the latest survey, 48% of respondents cited financial stress as the reason for greater anxiety in the survey week, higher than even the share of those who blamed COVID-19 (41%).
The post–COVID-19 world will have a lot in common with the one we lived in before the pandemic, but some things may change permanently.16 This will likely impact consumer spending patterns over the medium to long term.
We can safely assume that such changes will have an impact on the amount, nature, and even mode of consumer spending. Changes to the way people work and live, for example, will ensure that demand for durable goods will remain healthy even three to four years from now. That’s why we expect spending on durable goods to bounce back during 2023–2025 after a likely correction in 2022. Similarly, the switch to online purchases during the pandemic is likely to sustain even though most consumers feel safe to visit stores and restaurants now, as figure 7 shows.17 However, it’s hard to predict the extent of such changes and whether they will persist beyond this decade. Economists will be able to paint a clearer picture only when the nature of the postpandemic world becomes more evident.
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