Will consumers ever return to their pre-crisis consumption behaviors?
KC Mathews //June 23, 2020//
Will consumers ever return to their pre-crisis consumption behaviors?
KC Mathews //June 23, 2020//
In the movie, “Field of Dreams,” there is a quote: “If you build it, he will come.” With minor modifications, “If you open it, they will come,” is a perfect descriptor of expected economic conditions around the world.
The contagious COVID-19 virus caused a global rolling economic shutdown as the virus spread. In the U.S., economic activity ground to a halt around March 16. Now, after an approximate two-month shelter-in-place order, states are reopening their economies. The question is, “Will they come?” Will consumers return to their pre-crisis consumption behaviors?
The economy is driven by the consumer. Approximately 68% of GDP is consumer activity. Government spending accounts for 18% of GDP. Business investment and housing make up 17%.
The consumer is paramount. At the end of the first quarter and into the second, the consumer abruptly curbed spending. In many cases, we didn’t have the opportunity to consume. If you wanted to go to the NCAA basketball tournament and spend, you couldn’t, since it was canceled. If you wanted to go to the movies; nope, they were closed.
This is a vicious circle. Government spending could also be impacted if the consumer doesn’t come back and spend. Thousands of state and local budgets rely on the consumer via sales tax revenue. In April, retail sales were down 16%. It is interesting to note that 60% of total government spending is state and local governments.
U.S. first quarter GDP shrank by 5.0%, with the U.S. economy shut down for only 16 days in the quarter. A massive contraction is expected in the second quarter, with GDP anticipated to be down 26%. To put that in perspective, during the Great Recession, in the fourth quarter of 2008, GDP declined 8.2%. We do expect a significant rebound in the second half of 2020.
It appears that COVID-19 significantly impacts the elderly. What if certain demographic groups reduce or change their spending behavior permanently? Consumers over the age of 55 are responsible for 40% of total consumption. Consumers over the age of 65 are responsible for 20% of total consumption.
All of us spend more on health care as we age. Health care spending is 11% of GDP. The first quarter provided data on how spending may change. As hospitals and doctors’ offices were full of COVID-19 patients, others chose not to visit either one of them. Health care spending was down 18% in the first quarter. Consumption and GDP may be negatively impacted if those over the age of 55 don’t go out and spend.
Consumers require two factors to open their wallets: The ability and the willingness to spend. Most of us require wages as a source of income, giving us the ability to spend. Unfortunately, in the first nine weeks of the shutdown, 38.6 million Americans have filed for initial unemployment benefits, raising the unemployment rate to 14.7%. We expect the unemployment rate to move higher, closer to 17% over the next few months, and end the year around 10%.
Consumer confidence data gives us insight on the consumer’s willingness to consume. With unprecedented layoffs and the stock market debacle, down 34%, consumer confidence was expected to decline. Yet confidence has not declined to levels witnessed in the Great Recession.
There are several rays of sunshine:
The shortest recession in history, according to the National Bureau of Economic Research, lasted six months, from January to July 1980. If the economy reopens in a safe and sustainable manner, instilling confidence in workers and consumers, that record for the shortest recession may be in jeopardy. The current stock market rally is suggesting this will be the case.
The global pandemic started in China, spread to other Asian countries, then on to Europe and the U.S. Since many countries are in front of us by two to four weeks, we will have the ability to analyze empirical evidence on flattening the curve and consumption behavior as economies reopen.
Perhaps a more fitting title for this article would be, “If you open it, in a safe, familiar and convenient manner, with a potential vaccine and/or treatment, and there is capacity in hospital ICUs, then they will come.”