Consumer spending is the backbone of the U.S. economy, making up over two-thirds of our $20 trillion annual GDP. This includes spending on all goods and services, large and small.
In normal times, many factors — including consumer confidence, the job market, household net worth, inflation, the stock market, and more — affect the level of purchases. Of the various components of GDP, consumer spending has been the most stable over the past decade.
Consumer Spending During National Lockdown
With the economy slowly reopening across the country, it’s important to take stock of how consumers have fared. Some consumers have been unwilling to spend due to economic uncertainty, while others have simply been unable to go to stores.
Some substitution of spending has taken place, such as from restaurants to grocery stores and from in-store to online, but this doesn’t begin to make up for the overall decline. For instance, after growing an average of 4.2% per year, overall retail sales shrank by 21.6% in April during the lockdown.
Chart: Retail sales have plummeted due to the nationwide lockdown. The only exception has been in online shopping.
Is Consumer Spending Just Delayed?
Given the importance of consumer activity, there are two considerations when it comes to the broader economy as the country begins to reopen. First, while some portion of this spending may be lost forever, especially when it comes to dining out, some purchases may simply be delayed. New automobiles, for instance, will be needed regardless of whether they can be pushed back a few months. The same is true of other durable goods (think washers and dryers) and household necessities that can only be fixed with duct tape for so long.
Second, the silver lining, to the extent there is one, is that household savings rates have skyrocketed to historic highs over the past two months. This is the obvious flip side to a lack of spending: For those able to receive paychecks, more will be kept as cash and investments. Additionally, for those who are in a position to borrow and spend, interest rates will likely remain low for quite some time, with the 10-year Treasury yield currently hovering around 0.6% and the 30-year mortgage rate under 3.5% nationwide.
Chart: Household savings skyrocketed during the economic shutdown. This means that some households may begin to spend again as stores begin to reopen.
Signs that Spending Should Recover
Of course, not all households have equal resources, which is why government support, including via the CARES act, has been important. However, like the economy as a whole, the average American consumer was in a healthy position entering the crisis. Overall household net worth exceeded $118 trillion according to the Federal Reserve’s last estimate, unemployment was near 50-year lows, and wages were rising faster than inflation.
Thus, those who were ready to make larger purchases before this crisis may find it even more attractive to do so in the coming months. While the consumer spending and retail sales numbers may be worrisome, some will likely make catch-up purchases once the economy reopens.
Investors with a long-term perspective should see through the current decline to better understand the future of the consumer-driven economy.