By Ray Janssen, Senior Analyst, Invesco Fixed Income
A temporary boost in durables spending has masked a severe drop in services spending.
Since the start of 2020, we have witnessed the most volatile period of consumer spending in US history. The primary catalyst has been the COVID-19 pandemic, which has taken almost 1 million lives globally.1 It has been the worst pandemic since the Asian flu in 1957, which resulted in 1.1 million lives lost, including 100,000 in the US.2 To minimize the chance of contracting the virus, millions of consumers have disrupted their lives to avoid contact with others. Businesses and local governments have also restricted commerce to enforce social distancing guidelines. These changes have caused consumer spending to plunge, driven by sharp declines in spending on services and consumer durables. While some obvious consumer trends have emerged from the COVID-19 crisis – such as the boon to online retailers and the devastating damage to the cruise industry – we analyze recent consumer data to uncover less obvious COVID-19-related trends and changes in consumer behavior.
Shifts in US consumer spending patterns
US consumer spending totaled some $13 trillion in 2019.3 Most spending was on services ($8.5 trillion) followed by non-durable goods, like groceries ($3 trillion), and durable goods, like appliances ($1.8 trillion).4 After the onset of the pandemic in March, US spending on non-durables spiked by around 7% year over year, as consumers stocked pantries to prepare for an extended home stay (Figure 1). Spending on durable goods and services, on the other hand, fell by around 8% (Figure 1). As fears over the coronavirus peaked in April, total spending fell an astounding 16% year over year, but consumption in certain services sectors, such as hotels and airlines, cratered by more than 80% versus the previous year.5
Figure 1: Real US consumer spending (year-over-year % change)
May marked the beginning of the recovery when durables spending exploded after April’s 19% year-over-year decline to rise 3% in May (Figure 1). Durables spending remained strong throughout the summer, with double-digit gains in June and July. This surge was surprising initially, as high unemployment and a weaker economy are typically major headwinds to durables spending, but a closer look at the details explains this anomaly.
Durables spending led by cars, work from home, firearms
Figure 2: Durable goods leaders (year-over-year % change)
Within durables spending, there was a notable spike in used vehicle sales. Sales climbed 15% year over year in the summer, as consumers who might have previously used public transportation sought safer options (Figure 2). A shortage of used vehicles and higher prices are now driving demand for new vehicles as well. A second trend has been driven by one of the newest realities of American life: work and school from home. Summer sales of furniture (up 18% year over year) and personal computers and software (up 30% year over year) jumped as a result (Figure 2). We expect these trends to be short-lived for the same reason that sales of snow shovels temporarily peak after the season’s first snowfall. A separate trend – and one that we expect to remain intact – has been a rising demand for firearms. Spending on firearms and ammunition has risen an average of 30% year over year for the past three months (Figure 2).
Non-durables spending led by pantry goods, clothing, alcohol
Figure 3: Non-durable goods growth drivers (year-over-year % change)
While spending on non-durable goods has recovered to historical levels in aggregate, trends within the sector continue to be impacted by COVID-19. Groceries, cleaning supplies and paper products spiked at the onset of the virus as consumers built up supplies, unsure of how long they would be asked to shelter in place. As confidence grew that stores would remain open and necessities would remain available, consumable sales quickly returned to more normal levels. Grocery sales, however, have remained elevated (up 6% year over year) as consumers are still unable to eat out as often as they did pre-COVID (Figure 3).
Clothing and gasoline sales suffered dramatically during the shelter-in-place orders but began to recover when local governments allowed a gradual reopening of their economies. Children’s clothing has been the most resilient since children grow out of wardrobes. Men’s clothing has been the weakest, as work-from-home has reduced the need to replace old office apparel. Normally, gasoline sales can be used as a proxy for economic activity, but work and school-from-home have resulted in a semi-permanent drop in gasoline use that may last until a vaccine allows people to congregate without fear. Finally, spending on alcohol (up 13% year over year) has remained robust for the last six months, as consumers have been unable to patronize bars and restaurants and may be seeking a distraction from the elevated stress of today’s new normal (Figure 3).
Services spending led by leisure, especially gaming, dining
Services has been, and remains, the most challenging sector within consumer spending. While the impact of the pandemic on the housing and education sectors has been limited, there has been significant disruption to the consumer care and leisure categories.
Most observers might have expected COVID-19-related care to generate more spending on medical services, but the data show that hospital and doctor visits initially dropped around 40% before recovering, once consumers felt comfortable that COVID-19 cases were adequately isolated and “tele-doc” technology became more widespread (Figure 4). Dental care, which tends to be more preventative in nature and precludes patients from wearing masks, posted a steeper fall and continues to post a slower recovery. Personal care (such as hair and nail salons) has seen an even bigger fall, and the recovery has been anemic so far. Nursing home spending, which is usually relatively stable, since most clients are residents through the end of their lives, has seen a slow but steady decline with no recovery yet. Given the recent negative headlines and poor outcomes for nursing home patients during the pandemic, many families are reluctant to allow their relatives to move in under current conditions. Home care agencies and direct help from family appear to be filling the need in the interim.
Figure 4: Services: Growth in care spending remains anemic (year-over-year % change)
Within the leisure sector, the recovery has varied by category. Fast casual and “quick-service restaurants” have fully recovered, as drive-through restaurants with limited indoor seating are adequate for consumers looking for a casual meal away from home. The decline in full-service dining was much deeper, as consumers in this sector are often seeking more than just a meal but also an experience, which cannot be replicated via take-out.
Among travel-related sectors, leisure demand for airlines and hotels, for example, has shown significant recovery from April’s anemic levels. But we expect a slow recovery in travel spending overall, since business travel is likely to recover slowly as online communication increasingly substitutes for face-to-face business meetings. Gaming in local markets has fully recovered, but destination markets, such as Las Vegas, are still struggling as the return of conventions and international tourism may still be months away. We believe that live events, movie theaters and amusement parks will likely require a vaccine to fully recover, as occupying a room with dozens, or hundreds, of strangers is probably not sufficiently appealing to justify the current risk.
Figure 5: Services: Return of leisure spending (year-over-year % change)
While a temporary boost in durables spending has supported consumer spending overall, services spending – which represents the bulk of consumer spending – continues to suffer. If a vaccine is developed and distributed effectively, we would expect spending on services to accelerate. But extended delays in the availability of a vaccine would likely cause the recovery to be slow. Durables spending has benefited from the transition to life with COVID-19, but we expect it to return to more modest levels as furniture and personal computing sales slow from the elevated levels posted initially following the crisis, potentially dragging down overall consumer spending.
Invesco Fixed Income’s corporate research team will continue to dig deeper into the consumer data in the coming months to uncover underlying trends and opportunities as we seek to select the best investments for our clients.
1 Source: Worldometer, as of Sept. 18, 2020
2 Source: Centers for Disease Control and Prevention, as of Sept. 18, 2020
3 Source: US Bureau of Economic Analysis, as of Dec. 31, 2019
4 Source: US Bureau of Economic Analysis, as of Dec. 31, 2019
5 Source: US Bureau of Economic Analysis, as of April 30, 2020
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The opinions referenced above are those of the author as of Sept. 25, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
Consumers and COVID: Spending patterns adjust to the new normal by Invesco US
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