With economies worldwide gradually reopening, pundits’ worries about well-intended but commerce-quashing COVID-19 restrictions are shifting to fears that consumers themselves will choose to curtail consumption—forestalling recovery. They argue many won’t return to shops and restaurants, fearful of contracting the disease. Others, reeling from joblessness, might lack spending money. But Fisher Investments thinks fundamental misunderstandings of what consumers purchase—and how their spending impacts the economy—likely mean these fears are off base.
Let there be no doubt: Consumer spending is critical to the economy, accounting for nearly 70% of US Gross Domestic Product (GDP). [i] Spending often conjures images of big-ticket purchases, travel, electronics and jewelry, yet these splashy discretionary items are a relatively small slice of consumption. The vast majority is less exciting—and more consistent.
Almost two-thirds of spending is on services—including many that people use even in a normal economic contraction. Housing and utilities accounted for 16.4% of expenditures in 2019, for example, while transportation services and financial services/insurance combined for another 10%. [ii] In a typical recession, most people continue to pay mortgages and rent, gas and electric bills, and car and home insurance. They still pay bus or train fare to get to work or buy groceries, too. While some healthcare expenses—16.9% of spending—are discretionary, many (think prescriptions and care) are not. [iii] Of course, COVID-19 isn’t causing a typical recession. Its restrictions have unique impacts on spending—as we will discuss momentarily.
Collectively, spending on these “essential” goods and services typically dwarfs discretionary spending. Recreational goods and services, dining out and accommodations collectively accounted for less than 15% of consumption in 2019. [iv] That isn’t insignificant and obviously COVID-19 lockdowns have crushed these areas. But they are the minority of spending, typically making overall consumption less volatile than believed—even in contractions, in our view. Consider: In 2001’s recession, spending rose in each quarter.
The current contraction has been different. Americans’ spending plunged -7.6% annualized in Q1, as coronavirus fears spiked and governments ordered businesses shuttered. [v] Even seemingly essential consumption plummeted. Transportation spending sunk -29.2%. Healthcare spending fell -18.0%. [vi]
But unlike past contractions, underlying economic weakness didn’t drive spending down. Instead, society’s pandemic response blocked demand. As shutdowns lift, huge swaths of demand should return—relatively quickly. Spending on gasoline and transportation should rise relatively swiftly with workers returning to workplaces, for example. While rent and mortgage payments have been delayed in some cases, they will likely resume when restrictions lift. Healthcare spending—even its discretionary aspects—should return as governments permit hospitals and offices to perform elective procedures.
Some argue spending will be tepid if unemployment remains elevated after restrictions lift. History disagrees. After the last recession ended in 2009, the unemployment rate didn’t fall below 9% until Q4 2011. [vii] But Americans increased spending every quarter of that stretch save one—an annualized -0.6% slip in Q4 2009. [viii]
Some pundits have suggested consumers, fearful of another outbreak, will save more than usual after the shutdowns end. But even that wouldn’t preclude economic growth. More money in banks means more money to lend. In the shutdowns’ aftermath, many businesses and consumers will need capital. If some people save more, those funds will simply be redirected to others to spend. In this sense, one person’s saving funds another person’s or business’s spending and investment, driving growth. We guess if folks elected to bury cash in the yard or plow it into hard assets like gold bars, it would be pretty unproductive. But we suspect the number of people who would do that is miniscule.
Sentiment may remain weak and unemployment high well into this recovery—that is the norm. But as long as restrictions are largely lifted and workers are earning paychecks, we think consumer spending—and saving—will normalize faster than those fixated on discretionary purchases can fathom.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[i] Source: Federal Reserve Bank of St. Louis, as of 04/30/2020. Share of gross domestic product: Personal consumption expenditures. [ii] Source: Bureau of Economic Analysis, as of 04/30/2020. [iii] Ibid. [iv] Ibid. [v] Source: Bureau of Economic Analysis, as of 05/01/2020. Percent change from preceding period in real personal Consumption Expenditures. [vi] Source: Bureau of Economic Analysis, as of 05/11/2020. Percent change from preceding period in real personal Consumption Expenditures. [vii] Source: Bureau of Labor Statistics, as of 05/01/2020. Seasonally adjusted unemployment rate. [viii] Source: Bureau of Economic Analysis, as of 05/01/2020. Percent change from preceding period in real personal Consumption Expenditures.
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