World Views | The lack of fiscal aid won’t wreck US consumer spending

Tim Duy

In the world of investing, self-storage properties are about as bland as it gets. Then again, U.S. consumers are going to need a place to store the mountains of stuff they bought during the pandemic. Retail sales soared 1.9% in September, more than doubling analysts’ estimates of a 0.8% gain. The surge came despite the end of enhanced unemployment benefits at the end of July. Although concern is rising that the absence of a new fiscal aid package will cause retail sales to falter, such worries give too much importance to fiscal aid in supporting retail sales and not enough importance to the changing composition of household spending.
The fiscal aid from earlier this year, tax rebates, forgivable loans to businesses and enhanced unemployment benefits are widely believed to have saved retail spending. Although those moves helped, what seems to have been forgotten is that the drop in aggregate spending — which accounts for about two-thirds of the economy — early in the crisis actually exceeded the drop of incomes after excluding transfer payments. In short, saving rates would have risen even without the extra fiscal aid.
But with the fiscal aid, savings accumulated even faster and household balance sheets dramatically improved. Indeed, spending growth since June has been tracking income growth excluding transfer payments, suggesting that consumers can maintain the pace of consumption even without another fiscal aid package.
Notice, too, that aggregate spending remains below pre-pandemic levels while retail sales are now above pre-pandemic trends. This is because a change in the composition in household spending is the driving force supporting retail sales more so than fiscal aid. Retail sales are mostly goods (excluding food services of course) while overall household spending is mostly about services. Moreover, goods spending has been a steadily decreasing portion of overall spending for decades, at least until this year.
In the 2007-2009 recession, the proportion of spending on goods fell. This year, the proportion rose sharply. Goods spending now exceeds pre-pandemic spending as suggested by the retail sales numbers while services spending remains severely depressed.
In the 2007-2009 recession, households had a choice over how to curtail spending and opted to prioritize services. This year households really didn’t have a choice because much of the service economy, leisure and hospitality in particular, remains encumbered by the pandemic. Consequently, even as overall spending fell in-line with incomes excluding transfer payments and remains depressed, households are still effectively forced into spending more on goods. The only other option is to save even more but households have already been saving well above their pre-pandemic preferences.
I had been thinking that retail sales would soon fall back to its pre-pandemic trend. Now after thinking through the situation as outlined above, I am less sure that retail spending will quickly revert back to trend. A full rebound of the services sector will not occur before we get a widely available vaccine or herd immunity which means that households will continue to tilt spending toward goods, holding that sector strong even if the overall economy remains in a hole. To be sure, perhaps consumers will eventually become sated with goods spending, but even in these partisan times there remains a unifying force that binds all Americans together: The love of shopping.
When the pandemic eases, spending will shift back toward services. Don’t panic when that happens; the eventual slowdown in spending on goods won’t be a sign the economy is faltering but instead it is part of the healing process. Until then, households will continue to fill basements, attics and garages with the accumulated purchases of the pandemic era. They will eventually need to find new places to store their treasures and I expect they will turn to another feature of the American landscape – the self-storage center. Tim Duy, Bloomberg