New Normal In Consumer Spending: Spending On Goods Up & Services Down
Retail sales hit new record highs in June and again in July. Record retail sales reflect a new normal in consumer spending patterns. Bans and restrictions emanating from the pandemic have boosted retail sales while curtailing spending on consumer services. That's the exact opposite of the typical sales pattern during a recession. Pent-up demand and fiscal stimulus also played a role.
Here are a few observations on retail sales:
First, the initial report is based on a sample of 5,500 employer firms. Large retail employer firms have many retail establishments, but the initial reports still represent a small portion of the sales from 3-plus million retail establishments.
That’s not to say the latest reports on retail sales are wrong. But in the current environment, it’s probably safe to assume the retail survivors and winners dominate the early reporting. Only when there is a more complete tally of store sales is it possible to properly assess the overall retail sales performance, as well as the sales trends at different retail establishments.
Second, some of the recent sales reflect pent up demand from the closure of the economy for 6 weeks from late March to early May. At one point during the closure, sales at clothing, sporting goods, and furnishing and appliance stores fell to the lowest levels since the Census monthly sales report began in 1992.
So as the economy re-opened sales that would have taken place over of several months were bunched into a few months, making June and July sales appear exceptionally strong.
Third, bans and restrictions emanating from the pandemic have directly and indirectly helped to boost retail sales, especially over the past few months. Unable to travel overseas or attend spectator events have compelled people to redirect their travel spending to their local community and entertainment budgets to their “home”. A record level of sales at electronic and appliance stores and home remodeling and building stores offer strong evidence that this shift in spending is occurring.
How much of this has occurred or is still to come is hard to say. But it does involve a lot of money. In 2019, consumers spent $63 billion on passenger fare foreign travel, $100 billion on food, lodging and other items outside the US, and $80 billion on spectator events.
Fourth, Federal stimulus payments also played a key role. That's because the record $3 trillion in federal stimulus payments that flowed to people in Q2 is equivalent to the total dollars spent at retail establishments for the past 6 months combined. Failure by Congress to extend stimulus payments will hurt retail sales even as other factors continue to offer support.
The pandemic-driven consumer spending recession is atypical. In a typical recession, consumer spending on goods (retail sales) bears the brunt of the decline, while spending on consumer services often posts modest gains. But sales patterns have flipped flop in the current downturn.
In Q2, for example, consumer spending on consumer services contracted at an annualized rate of 43.5%, 4X times the 11.3% annualized decline in goods. That unusual sales pattern continues in Q3 with sales of goods improving while spending on services remains severely depressed. Spending on services accounts for 70% of total consumer spending. A full consumer spending recovery is still far off into the future.