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Pent-Up Demand Unlikely to Drive a Full Recovery for Retail or the Economy

Wary of Rising Cases, Many Consumers Lack Confidence to Spend at Pre-Pandemic Levels

Photo Courtesy of Getty Images.

When stay-at-home orders were announced across the U.S. in late March, consumer spending collapsed as millions of workers were furloughed or laid off. By mid-April, spending had declined 33% before finally beginning to recover as stimulus checks and enhanced unemployment benefits replaced income for those without work.

States began to reopen their economies as the number of confirmed cases of the virus began to recede. After months with no access to physical retail, consumers started to come back and spend, though certainly not at the same levels as prior to the pandemic. Mass layoffs, furloughs and pay cuts caused consumer sentiment to collapse in March and April, while an ever-present risk of infection loomed over any increase in social contact. This combination means it will take more than just reopening stores to bring consumers back.

However, the government-provided stimulus was effective, and by July 1, consumer spending began to improve, with low-income areas recovering close to pre-recession highs.

The difference between spending by income tiers is notable. Low-income households probably did not have much room to cut spending in the first place. About 40% of households would struggle to handle a $400 emergency expense before the crisis, so a significant share of these households were spending primarily on necessary goods to begin with.

On the other hand, spending levels remain depressed for high-income households as they pull back on services where face-to-face interactions are necessary. The weaker demand for services shows up in the differences in spending across categories. The apparel and general merchandise category has shown signs of recovery and is down just 4.5% from its pre-crisis baseline, compared to entertainment and recreation spending, which is down 49%.

Entertainment and recreation facilities, particularly indoor facilities, are more likely to remain closed, which has certainly capped spending in the sector, but nervous consumers will also generally spend less money on discretionary purchases.

According to the University of Michigan, the index for business expectations between January and May dropped by 50% for high-income households, compared to 40% for low-income households, despite most of the job losses being focused on low-income workers. Unless high-income households become more comfortable spending, any benefit from pent-up demand in the retail sector and the economy will be limited to low-income households.

Even then, low-income consumers spend less on entertainment and leisure, sectors that have been among the hardest hit during this crisis. Additionally, for all income levels, the recent turn around in spending it does not happen on its own. The recovery in consumer spending coincides with the disbursement of aid from the Coronavirus Aid, Relief, and Economic Security act.

Total disbursements through wages and salaries dropped 3.5% between March and May. However, including government aid, total disbursements increased by 7.6% over that same period, which means households were receiving more than they ever had before. The enhanced unemployment benefits alone often paid workers more than their former wages.

This boost to disposable income came at a time when lockdowns made spending more difficult and consumers felt less confident in their financial situations. The combination of these factors caused the savings rate to increase from 8.4% in February to an all-time high of 32.2.% in April.

The high rate of saving paired with an increase in disposable income has led to record levels of income being saved. In fact, in just April and May alone, nearly $850 billion was saved by the U.S. population, surpassing the amount saved over the previous seven months combined.

The increased savings suggests that, if consumer sentiment rose and retail stores reopened, there would be enough money in consumers’ wallets to support a strong bounce back in spending.

While the fact that the U.S. population has the financial ability to drive a strong recovery in spending is a positive sign, consumer sentiment is still well below pre-COVID levels and there are many obstacles to overcome before retail across the country fully reopens.

Additionally, with 18 million workers claiming unemployment insurance, much of the recent saving has been made possible because of the $600 per week provided by the CARES act, which is set to end on July 31. Unless additional stimulus is distributed, many people will lose the ability to save or spend. Further, as increases in confirmed cases of the virus bring about the possibility of renewed lockdowns, it is important to consider how much physical retail will remain open to consumers.

As retail across the country began to reopen in recent months, some malls and retailers were surprised by how quickly customers returned. Macerich reported “near normal levels” of foot traffic at several centers in a June 18 press release, and Macy’s reported that “reopened stores are performing better than anticipated” in its first-quarter financial results statement.

High-frequency data from OpenTable, an online restaurant-reservation service, showed that many people were ready to return to restaurants after months of limited access to physical space. At the start of April, restaurant reservations were essentially nonexistent, with a vast majority of dine-in restaurant service shutdown.

However, as the first wave of states began to reopen, including many Sunbelt markets, reservation activity picked up, with the average of these states climbing back to about half of 2019’s level by late June. States that reopened later experienced a similarly shaped recovery, but on average, they have yet to reach that halfway mark.

While this recovery-in-progress does provide a glimmer of hope, there is a long way to go to get back to pre-COVID levels. Part of this is surely due to restaurants operating at reduced capacity, but demand is also likely capped by consumers’ hesitation to return to public spaces. As long as these obstacles are present, they will impede pent-up demand from playing out in a meaningful way.

In addition, according to this metric of restaurant reservations, the recovery rate appears to have plateaued for both early- and late-reopen states. This is particularly concerning, because the percent of tests that came back positive for COVID-19 has started to increase. So far, the increase is minor for later reopen states, but early reopen states are accelerating relatively quickly. This may result in increased fear for shoppers and creates the potential for renewed lockdowns.

While there have been positive signs that the country could benefit from pent-up demand for shopping, there are likely too many obstacles in the way for it to have a meaningful impact on retail or the economy at large. Consumer confidence and spending have been on the rise, but they are far from normal levels and spending has yet to return for high-income households.

Income lost from layoffs and furloughs has been largely offset by unemployment insurance and stimulus payments, which has allowed people to build up savings. However, additional stimulus is needed for some semblance of financial stability to remain for many households.

Finally, high-frequency data has shown that many people have a willingness to return to normal activities, such as dining at restaurants, at least to an extent. But the rise in positive COVID-19 cases, particularly in states that were among the first to reopen, could result in reduced activity from fear and renewed lockdowns.

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