Consumer Spending unlikely to reach 2019 levels before 2022 and may have contracted by around 4% in 2020
The US is the largest consumer market in the world. According to BEA data, consumer spending totaled US$ 13.24 trillion in 2019 (spending on durables, nondurables and services). Annually, consumer spending grew by 2.4% in 2019 (compared to 2.7% in 2018) and slowed markedly after Q2 2019, as spending on durables and nondurables decelerated sharply in the second half of 2019 (though spending on services remained resilient until Q4 2019).
In contrast, in the first half of 2020, the plunge in consumer spending was heavily concentrated in the services category. Thereafter, in Q3 2020, even after spending on services rebounded and grew at an annualized rate of 38%, the level of spending on the same was 7.3% lower than the corresponding period in 2019. In comparison, overall consumer spending, which grew at an annualized rate of 41% in Q3 2020, was 2.8% lower than in Q3 2019.
Having stated the above, due caution must be exercised while interpreting the strong rebound in consumer spending in Q3 2020. This is because essentially spending on services, which accounted for 61.3% of total consumer spending in Q3 2020, remained lower than in Q3 (and Q4) 2019. When over 60% of consumer spending is lower year-on-year (y/y) and has an oversized influence on US GDP growth, it implies that for durable economic recovery consumers must enhance their spending on services significantly and consistently. The importance of spending on services for US GDP growth can be gauged by the fact that the same accounted for an average of 65.9% of total consumer spending between 2010-2019 and 64.4% in 2019.
Next, before delving into consumer spending between Q1 2020 - Q3 2020, refer to graph 1 on this key indicator for the period 2010-2019, and broad structure of consumer spending (demand) during this period - which will enable putting consumer spending in 2020 (up to Q3 2020) in proper perspective.
Graph 1: Real Personal Consumption Expenditures (Total) and on Three Main Categories (Annual Growth (%), 2010-2019)
Source: Federal Reserve Bank of St. Louis
Between 2010-2019 (10 years), consumer spending grew by an average of 2.4% (and 2.9% between 2015-2019).
Its three main components - spending on durables, nondurables and services - grew by an average of 6.2%, 2.2% and 1.9% respectively between 2010-2019 and 6.4%, 2.9% and 2.3% respectively between 2015-2019 (i.e. five years).
In essence, spending on each of the three main categories of consumer spending was on the average higher between 2015-2019 (stated above), compared to 2010-2014 (where the same grew by an average of 6%, 1.5% and 1.4% respectively). In 2019, spending on durables, nondurables and services grew by 4.8%, 3.1% and 1.8% respectively.
Source: Bureau of Economic Analysis, US (% calculations are based on BEA data)
Having stated the above, to put the aforesaid growth rates into perspective, its important to note the share of each major category of spending as a percentage (%) of total consumer spending. Between 2010-2019 (10 years), consumer spending on durables, nondurables and services averaged 11.5%, 22.7% and 65.9% of total consumer spending respectively in the US. Between 2015-2019 (5 years), consumer spending on durables, nondurables and services averaged 12.6%, 22.6% and 65.1% of total consumer spending respectively. In 2019, the same accounted for 13.4%, 22.7% and 64.4% of total consumer spending respectively.
Spending on services has major impact on US GDP contraction or growth.
In essence, given that consumer spending on services dominates overall consumer spending in the US, how fast or slow it grows or declines has a major upside or downside impact respectively on US economic growth. For example, in Q2 2020, where the US economy contracted by an annualized rate of 31.4% - consumer spending on services itself contributed to 69.9% of the decline in GDP (while total consumer spending contributed to around 76.5% of the decline in GDP). Similarly, in Q3 2020, where the US economy bounced back strongly and grew at annualized rate of 33.4%, spending on services itself contributed to 47.6% of surge in GDP (while total consumer spending contributed to 76.2% of the surge in GDP in Q3 2020).
The inference here is that economic recovery of the US economy in the post-pandemic period will depend particularly on the trajectory of growth of consumer spending on services. The same in turn will depend crucially on key factors such as control of the pandemic, vaccine dissemination, labor market conditions, wage and income growth, consumer confidence, household savings and fiscal support to the US economy - among other factors.
Graph 2: Real Personal Consumption Expenditure (Total) and on Three Main Categories (Annualized Rate, Q1 2020 - Q3 2020)
Source: Bureau of Economic Analysis, US
Key Points and Backdrop - Consumer Spending:
The strong rebound in consumer spending in Q3 2020 has to be viewed in the context of the fact that it is really just a rebound after a trough in consumer spending in the first half of 2020 (as is evident from graph 2).
Consumer spending started to weaken considerably after Q2 2019. It grew at an annualized rate of 3.7% in Q2 2019 and decelerated sharply thereafter, growing by 2.7% and 1.6% in Q3 2019 and Q4 2019 respectively. Thereafter, it contracted by 6.9% and 33.2% in Q1 and Q2 2020 respectively (before growing at annualized rate of 41% in Q3 2020).
The fall in spending on durables was particularly sharp after Q2 2019. The same which grew by 12.7% annualized rate in Q2 2020, slowed down sharply thereafter, growing by 6.3% and 3.1% in Q3 2019 and Q4 2019 respectively. In Q1 2020, consumer spending on durables contracted - declining by 12.5%. Thereafter, among the three (3) main categories of spending, it declined the least in Q2 2020 (by 1.7%), before growing at annualized rate of 82.7% in Q3 2020.
The fall in spending on nondurables after Q2 2019 to Q4 2019 was also sharp. The same which grew by 5.3% annualized rate in Q2 2019, slowed down sharply thereafter, growing by 3.1% in Q3 2019 and declined by 0.7% in Q4 2019. Thereafter, this was the only category of spending that recovered in Q1 2020, where it grew by 7.1%. However, it plunged by 15% in Q2 2020 (more than durables but less than services), before growing at an annualized rate of 31.1% in Q3 2020.
With reference to spending on services, among the three main categories, the same was the most resilient in 2019, before it contracted sharply in Q1 and Q2 2020. After growing at an annualized rate of 1.9% in Q2 2019, it grew by 2% in both Q3 2019 and Q4 2019. However, the same contracted sharply in Q1 and Q2 2020 - declining by 9.8% and 41.8% in Q3 2020 respectively - before growing at an annualized rate of 38% in Q3 2020.
In essence, spending on durables and nondurables has turned out to be more resilient during the pandemic than spending on services.
Even after the strong rebound in consumer spending in Q3 2020, the same was 2.8% lower than the corresponding period of 2019 (i.e. Q3 2019).
Among the main categories of consumer spending, while spending on durables (15.7% of total consumer spending in Q3 2020) and nondurables (24.4% of total consumer spending in Q3 2020) was 12.8% and 4.3% higher respectively in Q3 2020 than in Q3 2019, spending on services, which accounted for 61.3% of total consumer spending in Q3 2020, was 7.3% lower in Q3 2020 than the corresponding period in 2019 (i.e. Q3 2019).
Essentially, the pandemic has had an uneven effect on consumer spending in the US - with weakness in consumer spending predominantly focused on spending on services.
Consumers in 2020 (up to 2020Q3) purchased relatively more goods (durable and nondurable goods) than services, unlike 2019, which can be attributed to the pandemic.
In essence, the pattern of consumer spending changed during the pandemic in the US.
Interestingly, consumer spending on services as a percentage (%) of total consumer spending went down in every successive quarter between Q1 2020 and Q3 2020. The same accounted for 61.6% and 61.3% of total consumer spending in Q2 and Q3 of 2020 (and 63.8% in Q1 2020) respectively, compared to 64.2% and 64.3% of the same in Q3 and Q4 of 2019 respectively.
In contrast, with reference to spending on durables as % of total consumer spending, the same accounted for a higher percentage i.e. 14.7% and 15.7% of total consumer spending in Q2 and Q3 of 2020 respectively, compared to 13.5% and 13.6% of the same in Q3 and Q4 2019 respectively. Similarly, spending on nondurables accounted for 24.9% and 24.4% of total consumer spending in Q2 and Q3 of 2020 respectively, compared to 22.7% and 22.6% of the same in Q3 and Q4 2019 respectively.
Having stated the above, it’s absolutely essential to gauge the strength of consumer spending within the sub-categories of spending on durables, nondurables and services. Given below are three graphs which clearly show how higher or lower (%, y/y) was each sub-category of spending within the main categories of spending - services, durables and nondurables - in Q3 2020, compared to Q3 2019.
Graph 3: Real Consumer Spending on Services (% Change (Y/Y), Q3 2020)
Source: (% Change, Y/Y) - calculations based on Bureau of Economic Analysis data
Graph 4: Real Consumer Spending on Durables (% Change (Y/Y), Q3 2020)
Source: (% Change, Y/Y) - calculations based on Bureau of Economic Analysis data
Graph 5: Real Consumer Spending on Non-Durables (% Change (Y/Y), Q3 2020)
Source: (% Change, Y/Y) - calculations based on Bureau of Economic Analysis data
Abbreviations explained:
H&U - Housing & Utilities
HC - Health Care
TS - Transportation Services
RS - Recreation Services
FSAA - Food Services and Accommodations
FSI - Financial Services and Insurance
OS - Other Services
DG - Durable Goods
MVP - Motor Vehicles and Parts
FDHE - Furnishings and Durable Household Equipment
RGS - Recreational Goods and Services
ODG - Other Durable Goods
NDG - Non Durable Goods
FBC - Food and beverages purchased for off-premises consumption
CF - Clothing and Footwear
GEOG - Gasoline and Other Energy Goods
ONDG - Other Non-Durable Goods
Key Points
It is evident from graph 3 that consumer spending on most sub-categories of services was substantially lower in Q3 2020, compared to Q3 2019 (i.e. the corresponding period in 2019).
In four sub-categories - spending on transportation services, recreation services, food services and accommodations, and other financial services - spending in Q3 2020 was 24.6%, 34.3%, 19.7% and 13.5% lower respectively than in Q3 2019 i.e. substantially lower than in Q3 2019. This is not surprising, given the highly adverse impact of the pandemic on these services.
In the other two main categories of spending - durables and nondurables - it is only consumer spending on gasoline and other energy goods that was lower (9.9%) in Q3 2020, when compared to Q3 2019. Overall spending on durables and nondurables was higher by 12.8% and 4.3% respectively in Q3 2020, when compared to Q3 2019.
Essentially, consumers purchased relatively more durable and nondurable goods in 2020 (up to Q3 2020) than they spent on services.
In essence, consumer spending on durables and nondurables turned out to be more resilient during the pandemic than services. Further, even though the level of spending on 5 out of 7 sub-categories of services was significantly higher in Q3 2020 than in Q2 2020, the same did not to recover to Q3 2019 and Q4 2019 levels.
Continued weakness in consumer spending on services was only partially offset by higher consumer spending on durables and non-durables - y/y (particularly on durables - notably on recreational goods and services, followed by furnishing and durable household equipment, other durable goods, and motor vehicles and parts) - in Q3 2020.
Given that spending on durables and nondurables together accounted for only 40.1% of total consumer spending in Q3 2020, overall consumer spending was lower (2.8%) in Q3 2020, when compared to Q3 2019.
Next turning to consumer confidence, a key driver of consumer spending, the same fell sharply to 71.8 in April 2020, from 101 and 89.1 in February and March 2020 respectively (refer to graph 6 below). It averaged 74.1 between April and June 2020. On a y/y basis, consumer confidence fell very sharply between April and July 2020, falling by 26.1%, 27.7%, 20.5% and 26.3% respectively compared to the same period in 2019 (refer to graph 7 below).
As consumer confidence plunged during this period, household savings surged and consumer spending, as a consequence, nosedived in Q2 2020.
For a perspective, it is interesting to note that the personal savings rate rose sharply in March 2020 to 12.9%, from 8.3% in February (and averaged around 7.5% between March 2019 and February 2020 (12 month period)). Further, in April 2020, the personal savings rate shot up to an all time high of 33.7% and came down thereafter to 24.7% and 19% in May and June 2020 respectively. However, during this period, the personal savings rate was too uncomfortably high (averaging 25.8% in Q2 2020) - refer to graph 8 below.
In essence, as households got increasingly nervous about pandemic related developments and heightened uncertainty associated with the same, personal savings rose sharply and consequently consumer spending plunged in Q2 2020.
Graph 6: University of Michigan - Consumer Sentiment Index (February - December 2020)
Source: theglobaleconomy.com
Graph 7: Consumer Sentiment Index, March - December 2020, (Change (%), Y/Y)
Source: calculations are based on data sourced from theglobaleconomy.com
Having stated the above, the key point to note is that the surge in consumer spending in Q3 2020 (which increased at annualized rate of 41% in Q3 2020) seems just a post-lockdown mechanistic rebound - predicated on pent-up demand, consumers drawing down their savings and not to significant rise in consumer confidence (which averaged 76.1 in Q3 2020, compared to 74.1 in Q2 2020) - rather than a genuine or actual recovery in consumer spending.
In the face of dismal income prospects, disconcerting state of the labor market, low consumer confidence (refer to graph 7 above), highly elevated personal savings rate (refer to graph 8) and fall in real personal disposable incomes - which fell q/q by around 4.4% in Q3 2020 - (refer to graph 9 below) - the strong rebound in consumer spending in Q3 2020 should be put in proper perspective (also, due to the fact that spending on services continued to remain much lower in Q3 2020, when compared to Q3 2019) and not misinterpreted.
Graph 8: Personal Savings Rate (%), January 2019 - November 2020
Source: Federal Reserve Bank of St. Louis
Having stated the above, returning to data, on a y/y basis, consumer confidence was 26.3%, 17.5% and 13.7% lower in July, August and September 2020 respectively when compared to the same period in 2019. Further, though the personal savings rate fell to 18.6%, 15.1% and 14.6% in July, August and September respectively (after having experienced a significant jump between March and June - refer to the graph 8 above), it still remained highly elevated in Q3 2020 (averaging 16.1%). Further, though the personal savings rate has been falling consistently after April 2020, it yet remained substantially elevated by historical standards even in October and November 2020 - where it stood at 13.6% and 12.9% respectively (as is evident from the graph 8 above).
This is not surprising, given the second wave of the pandemic and consumers having to contend with uncertainty regarding job, wage and income prospects, and political and fiscal stimulus related uncertainty during this period.
Graph 9: Real Personal Disposable Income (Change (%), Quarterly)
Source: Federal Reserve Bank of St. Louis
Graph 10: Real Personal Disposable Income (Billion, US$, Monthly)
Source: Federal Reserve Bank of St. Louis
From the aforesaid graph 9, the underlying weakness in real personal disposable income is apparent. What is particularly notable is that the same declined by 3.3% month-on-month (m/m) in August. Thereafter, apart from rising by 0.6% m/m in September, the same declined m/m again in October and November 2020 (contracting by 0.8% and 1.3% respectively).
Going forward from Q3 2020, given the aforesaid data driven insight on consumer spending (total, and spending on durables, nondurables and services), consumer confidence, personal savings rate and real personal disposable income in this article ( along with our analysis of credit card spends, disconcerting state of the US labour market, overall state of the US economy and possibility of widespread covid related vaccination in the US by the end of the first half of 2021) - it seems that consumer spending is unlikely to revive from the adverse impact of the pandemic on the same until the latter half of 2021 (regarding 2020, we expect consumer spending to contract by around 4%, after the same rose by 2.4% in 2019).
More specifically, between Q4 2020 to Q2 2021, consumer spending is likely to languish - particularly on services and durables, after the strong surge in Q3 2020. Thereafter, contingent or predicated upon the premise that widespread covid related vaccination will take place by the end of Q2 2021, consumer spending is likely to gain traction from the second half of 2021, particularly on services - as consumers become more confident about the economic outlook, job prospects, incomes, their health, recreation etc. and start to shed their inhibitions.
In addition, the strong likelihood of lot more support for consumer spending in the US via fiscal policy measures, given that the Democratic Party is on track to take control of the Senate (as per media reports on January 6, 2020) - which essentially means that a new round of fiscal stimulus (a more potent and effective one) in the near term (probably in Q1 2020) to counter the devastating economic effects of the coronavirus pandemic is much more likely - should also support consumer spending after the first half of 2021.
An initial spurt in spending on services in particular is possible in the latter half of 2021, due to pent-up demand and people wanting to resume spending on recreation, health and other services. Further, though we expect spending on durables to gain traction from the second half of 2021, the pace is likely to disappoint given that a full labour market recovery may not be possible before mid-2023, prospects of tepid wage and income growth and due to steady economic recovery unlikely until at least mid-2022.
Next, we don’t expect consumer spending in the US to reach 2019 levels before 2022.
For a perspective, though the earlier stimulus deal (US$ 900 billion stimulus package), passed on December 21, 2020, will provide aid or relief to the rapidly deteriorating US economy and prevent it from backsliding over the coming months, the relief measures are going to be short-lived. Such a stimulus is not really sufficient to get the US economy back of track.
Disclaimer: This article is for informational and non-commercial purposes only and should not be used as professional or investment related advice.
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