Fear of COVID-19 and the economic impact of the pandemic were enough to keep a strong lid on consumer spending for most of 2020. This year though the scenario has changed, and for the better. COVID-19 may still be around, but vaccines are holding forth against the virus—even the dreaded Delta variant.1 And with vaccination has come people’s confidence to venture out to pubs and restaurants, travel, visit stores, and attend in-person events.2 The result, therefore, is an uptick in consumer spending3, especially on services that had suffered last year, such as food services, transportation, and recreation services. The momentum is likely to continue as the use of vaccines spreads, including proposed booster shots for the elderly and those most vulnerable.
The ongoing labour market recovery will also aid consumer confidence and, hence, spending. Overall, we forecast real personal consumption expenditure (PCE)4 to rise 8.1% this year, rebounding strongly from a 3.8% contraction in 20205. With economic fundamentals expected to improve steadily through the medium term, PCE growth is expected to remain healthy. The nature of consumer spending in the next few years will, however, vary compared to 2020–2021, with spending on durables giving way to services.
The biggest change for Americans this year, compared to 2020, is vaccines. As of October 6, 55.2% of Americans are fully vaccinated, while another 8.8% have received their first of two doses of a vaccine.6 With rising vaccines, not only has consumer anxiety fallen since the start of this year7, but virus cases also reduced steadily in the first half of 2021. And although the recent spread of the highly infectious Delta variant has created some problems, the rise in virus cases is mostly among unvaccinated Americans, with vaccines proving effective enough to reduce hospitalisation and death among those who are vaccinated.8 Fear of the Delta variant may motivate previously hesitant citizens to get their shots9, while proposed booster shots may aid those who are vaccinated yet vulnerable to the virus due to age or underlying medical conditions.10
With anxiety going down and consumers less concerned about heading outdoors compared to end-202011, spending on services has picked up—PCE on services grew for the sixth straight month in August. However, given the scale of pressure on services spending throughout the worst of the pandemic last year, PCE on services is still 2.3% lower than what it was in February 2020—right before the pandemic struck (figure 1). The uptick in services adds to strength in goods spending during this period, with PCE on durables and nondurables up 17.3% and 13.1%, respectively. Overall, total consumer spending is up 2.8% from February 2020—a notable recovery given the sharp 18% decline between February and April of last year.
Among those services categories that were worst affected between February and April 2020, the recovery has been the strongest in spending on food services and accommodation. That’s not surprising, given that the share of Americans who feel comfortable to eat at restaurants and stay in hotels have gone up since vaccinations started, although the spread of the Delta variant has slightly dented confidence in recent months, as figure 2 shows. PCE on food services and accommodation in Q2 202112, for example, is just 3.2% lower than what it was in Q1 2019—the quarter before the pandemic started. While consumer spending on services such as transportation and recreation services has also been recovering, it is still much below prepandemic levels (figure 3).
Durable goods were the biggest beneficiary of consumer spending during the pandemic and is up by nearly 29%, compared to the end of 2019. Within durable goods, spending on recreational goods and vehicles shot up during the pandemic, as consumers spent on fitness equipment, for example, instead of heading out to the gym due to fears about the virus and social distancing restrictions. Remote work also meant that households invested in setting up their home offices, thereby likely pushing up spending on furnishing and durable household equipment (see figure 3). Within nondurables, spending on food and beverages has remained healthy as people stockpiled food during the pandemic. Meanwhile, clothing and footwear has recovered strongly since Q2 2020 after a sharp fall in the initial days of the pandemic.
It will be a tad unwise to attribute the recovery in consumer spending just to vaccines. The economic uptick since the second quarter of 2020 has also played a role. First, employment has been rising steadily since April 202013. In September 2021, employment was 15.2% higher than what it was in April 2020—the trough of the business cycle14—while the unemployment rate fell to 4.8% from 14.8% during the same period. The participation rate, which had dropped sharply between February and April last year, has also been edging up.
Second, earnings growth has also picked up during the pandemic. Data from the Bureau of Labor Statistics’ Establishment Survey reveals that between February 2020 and September 2021, average weekly earnings grew by 9.5%, far greater than earnings growth in recent years—in the last decade, annual earnings growth averaged just 2.5%.
Third, fiscal support has also aided consumers during this time. While the initial impact of the pandemic put nearly 22 million people out of jobs between February and April 2020, federal government spending worth US$5.4 trillion15 came to the support of many. The aid supported a wide variety of programmes, from direct income support to households and businesses to student loans and mortgage forbearance programmes.
Finally, consumers are also using what they had saved during the worst of the pandemic to spend more; the personal saving rate in August was 9.4%, down from the peak of 33.8% in April 2020. We calculate that consumers saved about US$1.6 trillion more than what they would have saved had there been no pandemic.
Aided by vaccinations and a stable economic recovery, we forecast consumer spending to expand by 8.1% this year and by 3.0% in 2022, a sharp change from the 3.9% contraction in 2020. Spending growth is likely to decline after that until 2026, which is the end of our forecast period16 (figures 4 and 10). A steady decline in unemployment and savings over 2021–2026 (figure 13) will aid spending during this period. The dip in savings and rising spending will ensure that consumer spending relative to disposable personal income (DPI) goes back to trend levels by 2022—spending relative to DPI had dipped to 80.6% in 2020 and is expected to recover only a little more than halfway this year (figure 12). Figure 11 also shows that the shares of DPI spent on durables and nondurables, currently well above trend, are likely to fall to prepandemic levels over the forecast period, while the share of DPI spent on services is projected to rise to prepandemic levels during this period.
• Services on a comeback. Leading the recovery in PCE this year and in 2022 will be services, as consumers flock back to pubs and restaurants, spend on travel and vacations, and enjoy sporting events as they did before the pandemic. It is likely that pent-up demand will also play a part as consumers spend some of their savings to make up for all the travel and leisure services they missed out on last year. PCE on food services and accommodation is likely to surge the most this year, with the recovery continuing steadily over the next few years (see figure 5).
As some workplaces open after more than a year-long hiatus, demand for transportation services will likely rise, although this is likely to face challenges from any hybrid work model where employees spend part of their work week in office and the rest remotely. And some hesitation still exists around communal travel, despite rising vaccinations. For example, in Deloitte’s latest consumer survey, only 49% respondents said they felt safe getting on an aeroplane17. Spending on transportation services is, therefore, not expected to return to prepandemic levels before 2022.
Overall, PCE on services is forecasted to expand 5.8% in 2021, with the momentum likely to go up from the latter half of this year well into 2022; growth will likely moderate after that (figure 10 for more details).
• There’s only so much gym equipment and furniture you can buy. Durable goods, the mainstay of consumer spending in 2020, is likely to fall from favour over the next year as people shift spending to services. Unlike spending on a family vacation or going to a baseball game, there’s a limit to the amount of durable goods a consumer can buy. Replacing one car with another every year or adding furniture at home frequently holds little sense. Nevertheless, given high spending in the first half of the year, PCE on motor vehicles and parts and, furnishings and durable household equipment is expected to strongly grow this year, before declining from next year up to 2026 (figure 6). Similarly, as figure 6 shows, spending on gym equipment will also likely ease from next year, thereby weighing on PCE on recreational goods and vehicles, which is forecasted to contract by 5.1% in 2022 after two years of high growth. Consequently, consumer spending on durable goods is forecasted to peak this year before declining for the next five years (figures 6 and 10).
• Stockpiling food won’t be necessary. As the threat of lockdowns decline and people also spend more on eating out, stockpiling groceries and essential household goods won’t be the norm anymore. Consequently, spending growth on food and beverages will moderate next year after strong growth in 2020 and 2021. Spending on clothing and footwear, which rebounded strongly in the first two quarters of this year, will witness strong annual growth in 2021 before contracting in the next two years, according to our forecasts (figures 7 and 10). Overall, spending on nondurable goods will likely decline next year by 0.4%, after strong growth this year.
The real PCE price index is projected to increase by 3.4% in 2021, compared to a 1.2% rise in the previous year. Prices across all categories of consumer spending—durables, nondurables and services—are expected to reflect the effects of robust demand meeting stymied supply. This mismatch is likely to be most evident in some segments, such as motor vehicles and gasoline. However, we expect the rate of price rise to moderate through the forecast period until 2026 because of two important assumptions.
First, consumer spending is expected to pivot way from durables and to some extent nondurables, toward services (as presented above). Second, the supply chain bottlenecks emerging currently will gradually ease over the forecast period.
These two assumptions are reflected in our price forecast for 2022–2026. As demand for durables ease and supply chains are relinked, prices of durables are likely to drop, returning to a broad downward trend. Prices of nondurables are expected to rise at a significantly lower rate over this period. And the PCE price index for services will likely rise at a slightly slower rate in 2022 and beyond (figure 8 and A.2 in the Appendix).
There are, however, key risks to the forecasts. First, the labour market recovery is crucial for continued consumer spending growth, given that the pandemic-induced fiscal aid for households has ended. There is still some way to go before the labour market can return to prepandemic levels. In September, for example, the ratio of employment to population was still below what it was in February 2020 (figure 9) and employment was still 5.1 million less. If employment and participation struggle to get back to prepandemic levels, consumer spending growth may turn out to be lower than forecasted.
Second, those engaged in middle- and low-wage occupations who lost their jobs during the pandemic face a more uphill climb as the recovery in employment in these categories has been slower than in high-wage occupations.18 While employment in high-wage occupations in September was 0.1% higher than February 2020, employment in medium-wage occupations was still down by 4.1% and in low-wage occupations, it was 3.5% lower19. If employment in these occupations doesn’t recover fast, consumer spending may suffer.
Finally, there is always the risk from the Delta variant or any deadlier mutation of COVID-19. If the spread of any such variant accelerates, especially among unvaccinated Americans, it will weigh on people’s concerns. And if left unchecked, it may force people to cut down on some of their outdoor plans, thereby denting consumer spending on services. In such a scenario, however, spending on durables may benefit like it did in 2020, although the net impact on overall PCE is unclear. It’s one scenario that pandemic-weary Americans will hope doesn’t play out.
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