here is no surprise that the recent COVID-19 pandemic which began in the first quarter of 2020 has had an effect on consumer behavior as well as the average spending levels of each household. To put it into perspective, in 2019, one year before COVID-19, consumers in the United States spent close to $10 trillion dollars on a range of products and services. Little did we know that the following year would see the pandemic change our lives and our spending, but for how long?
Normal activities that we didn’t give a thought to, the gym, in-store shopping, going to work - suddenly became a risk. Homes turned into offices. Shopping was limited as was movement. Travel became restricted. This would have a dire effect on the economy since consumer spending had suddenly decreased and the general consumption pattern had changed. Things that the average person would spend on routinely such as restaurant bills, travel, leisure activities and transportation were no longer a priority and instead, people focused on stockpiling items such as food and other essentials, hunkering down for a largely house bound existence.
This was in the early stages of the pandemic when there was so much uncertainty as to how long the pandemic would go on. As time went on and people became aware that the virus will be here to stay for the foreseeable future, retail spending habits changed even further to accommodate the circumstances brought by the pandemic.
The measures put in place by various state governments would affect the economy and thus cause a sharp decline in real personal consumption expenditure. Forced closure of most stores and shops limited the consumption options available. Together with other people being let go at work, dropping income levels combined with closures resulted in significant spending decrease relative to pre-pandemic spending.
Normal activities that we didn’t give a thought to, the gym, in-store shopping, going to work - suddenly became a risk. Homes turned into offices. Shopping was limited as was movement. Travel became restricted.
Another component of the decline in spending behaviors during the pandemic was increased saving levels. The situation caused concern prompting those who were fortunate enough to have an income during the pandemic to save a little more citing health and economic uncertainties.
To put it into perspective, personal savings rate ended 2020 at 14. 2%, nearly double what it was in December 2019. It is also worth pointing out that real personal consumption expenditure reduced by 3. 9% in 2020 compared to a 2. 4% expansion in 2019.
As you would expect, certain industries were hit harder than others as a result of the shift in spending habits. For instance, people were no longer going out to eat so restaurants that didn’t offer take-out options suffered considerably. Similarly, entertainment activities saw a decline because going out became limited or completely eliminated. Public transport was also highly affected because so many were homebound – resulting in a 50% reduction in passenger traffic.
However, while spending had reduced on certain things, other items were experiencing a subtle increase in demand. Home gyms for example and other recreational items saw a surge in spending because people as gyms closed or people didn’t want to risk going to the gym or it was forced closed. There was also an observed increase in spending on home furnishings as most people had to invest in better home offices since working from home would be the new norm.
Towards the end of 2020, vaccinations brought a glimmer of hope. By the following July, around 41. 4% of American adults had been fully vaccinated with another 9. 7% having received the first of two doses. This resulted in restrictions being eased and others completely removed with the hope of bringing the economy back to its pre-pandemic levels. The pandemic retail spending habits were seen to be slowly falling away. Traffic in restaurants and other outdoor entertainment venues started gradually increasing and public transport also saw a boom, particularly air travel which had been most affected.
Services spending, which had mostly been affected by the pandemic, also saw a small rise. For the first time in thirteen months (March 2021), real personal consumption expenditure grew year over year and a 19. 3% rise was observed the following month; however, this was measured against marginal performance provided in 2020.
As vaccination rates continue to rise and the economy goes back to full functioning, consumer spending is set to further increase although it won’t be on the things that saw surges during the pandemic. There is only so much furniture and gym equipment you can buy. With the increased savings that had been observed during the pandemic, spending power will be at a high so expenditure on goods and services is surely set to increase in the short-term. Unfortunately, inflation and logistics issues throughout the country aggravate the return to ‘normal.’ Combined, all these factors may even lead to a recession.
While the pandemic may have seen a reduction in spending, this will not be permanent. Ultimately, the set of circumstances that underpinned the reduced consumer spending are evaporating. However, the pandemic has made its mark. Inflation, logistics and gasoline obscure a clear path back to pre-pandemic spending. The long-term impact of newly formed behaviors (and how permanent they will be) will be a major factor in post pandemic spending. Bottom line – it will probably be some time before look like 2019, if ever.