U.S. services have better China lockdown defenses

By
3 minute read

A worker in a protective suit collects a swab from a resident at a residential compound under lockdown, following the coronavirus disease (COVID-19) outbreak in Shenzhen, Guangdong province, China March 14, 2022. Picture taken March 14, 2022. cnsphoto via REUTERS

Register now for FREE unlimited access to Reuters.com

NEW YORK, March 15 (Reuters Breakingviews) - New lockdowns in the Chinese manufacturing hub of Shenzhen presage more supply disruptions for companies like Apple (AAPL.O) and higher prices for consumers. Past snafus are one of the reasons that U.S. inflation has surged to a four-decade high of nearly 8%. As items from electronics to cars become ever more expensive, or even unavailable, households will revert to pre-pandemic habits and focus their non-essential spending on services like restaurants and travel.

In the past two years, cooped-up Americans bought more stuff. For example, spending on durable goods rose 14% in the fourth quarter of 2020 compared with a year earlier, according to the U.S. Bureau of Economic Analysis. But spending on services fell 5% over this period. In normal times, services account for about 70% of consumer expenditure so this drop meant more money was squirreled away, especially by wealthier households. Consumers accumulated about $2.6 trillion of excess savings during the pandemic, Moody’s Analytics estimates, with more than 70% of that held by the top fifth of the income distribution.

Consumer spending on both goods and services has increased in the past few quarters. Yet rising costs, particularly for food and energy, will lead to a rebalancing. Consumer prices rose 7.9% in the 12 months to February, according to the Labor Department. Meanwhile, services excluding those related to energy rose by a less eye-popping 4.4%. That will make eating out or booking holidays appear relatively more affordable to those who have money left over after paying for basics.

Register now for FREE unlimited access to Reuters.com

The spending patterns of richer households also favour companies like Hilton Worldwide (HLT.N) and Expedia (EXPE.O). The top 20% of households by income spent four times as much on travel as middle-income households, and eight times as much as the poorest, according to a Bureau of Labor Statistics report in 2010. High inflation may accentuate this further, as rising fuel and food costs eat up a bigger chunk of disposable income among the middle and working class. The well-off, who accumulated most of the $2.6 trillion of excess savings during the pandemic, will, however, be able to keep splurging.

An inflation-induced hit to U.S. consumption is bad news for all companies. But those in the service sector, which were worst affected by pandemic lockdowns, will better weather this new storm.

Follow @rob_cyran on Twitter

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

- Mainland China reported 1,807 new local symptomatic Covid-19 cases for March 12, the highest daily figure in two years and more than triple the caseload of the previous day, Reuters reported citing data from the National Health Commission on March 13.

- Shenzhen will suspend public transport from March 14 to March 20, and residents have been told to avoid “all unnecessary activities” and not to leave the city unless necessary as it conducts three rounds of mass testing, Shenzhen’s health authorities said in a statement on March 13.

- China accounted for 28% of global manufacturing output in 2018 according to the United Nations Statistics Division.

- American consumers accumulated $2.6 trillion of excess savings during the pandemic, according to Moody’s Analytics, with over 70% of this held by the top 20% of the income distribution.

Register now for FREE unlimited access to Reuters.com
Editing by Swaha Pattanaik and Sharon Lam

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.