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At the peak of the Covid-19 pandemic the world shut down, travel wasn’t allowed, restaurants closed, and many white-collar employees worked from home. There was government-led stimulus, enhanced unemployment benefits, student debt forbearance, and an increase in the child tax credit – all leading to more disposable income for many Americans.1
With most people staying home during the pandemic, a disproportionate amount of money went towards goods instead of services. Home renovations to facilitate comfortable work from home conditions became more common and e-commerce shopping saw an uptick2 as people had limited options for in-person shopping.
Where is the opportunity?
Fast forward to today and it’s clear some consumer shopping habits are reverting to pre-pandemic ways while others are staying, notes Newton research analyst Kyle McDonough.
“E-commerce spend is still above the pre-Covid 19 trend,3 but the growth rate has moderated from what we saw during the depths of the pandemic when stores were closed and consumers were forced to buy online,” says McDonough. “There is probably some gain that e-commerce will keep - consumer habits are historically very fickle, but once consumers try something and like it they tend to stick to it.” Higher gas prices may be another factor contributing to e-commerce’s gained footing.
Consumers trade down
During the peak of the pandemic, many consumers gravitated towards more expensive items than what they may have otherwise purchased. The pandemic caused a “trade-up” effect, as consumers were flush with cash and consolidated shopping trips due to health concerns. Even though US inflation was up 9.1% at the end of June 2022,4 people are continuing to spend.
“The data on spending continues to be robust as consumers work down their pandemic-driven savings,” says McDonough, “but inflation is currently eating into that. The high-level spend data is stable, but the nuance here is that consumers are spending a higher proportion of their income on things that have gotten more expensive due to inflation: gas and food most predominantly. As consumers spend a larger proportion of their income on more expensive necessities, it is causing them to pull back on discretionary purchases. Stable doesn’t necessarily mean healthy.”
If people begin to feel a financial pinch, they are more likely to “trade down” first, rather than not making purchases all together. “You might order in pizza rather than go out for steak or buy a private label product rather than the more expensive brand-equivalent,” says McDonough. “We should see the return of the ‘treasure hunt’ consumer.”
Consumer spending may be supported for the time being as many lower income workers have seen large wage increases.5 Yet despite the rise in income, there are some red flags.
“A 5% wage growth is nice, but in the face of 8 to 9% inflation, real wage growth is negative, which means wages aren’t keeping up with inflation,” says McDonough. “We’re also starting to see credit card debt start to rise. This means consumers have less disposable cash sitting around and they need to take on debt just to keep that same level of spend.”
The shift in discretionary spending has been felt by some big-box retailers. During the past couple of years there was a high demand for home décor and renovation materials as consumers were stuck at home, but now that supply chain bottlenecks have eased inventory for some types of products exceed demand.
“Retailers are seeing a slowdown in goods demand at the same time as supply chain pressures are easing, causing excess inventory to pile up. Retailers benefitted from short supply during the pandemic, allowing them to sell more full-price items,” says McDonough. “Over the next six months we should see this reverse: retailers will try to draw down their excess inventories through promotions, discounts, and liquidations. Consumers should be excited for the upcoming holiday season as there will be deals everywhere they look.”
Shopping gets emotional
The effects of inflation extend beyond the wallet and into people’s thoughts, also known as consumer sentiment and psychology. The combination of recession fears and inflation pressures is also exerting influence on people’s purchasing decisions.
The University of Michigan Consumer Sentiment Index is a gauge of consumer confidence and the willingness to spend. This indicator recently hit 50, which is the lowest reading since they started conducting the survey in 1961. In the depths of the 2008 Great Financial Crisis, the index only hit 55.6
“If you go on Twitter or watch the news you’ll see the trending topic is recession,” says McDonough. “A lot of times, even if we aren’t technically in a recession, the psychological burden of thinking there are bad days ahead will beget a slowdown in spending. If consumers are scared about increases in their cost of living, they will cut back in other areas of their lives.”
Much attention has focused on low-income consumers, but higher-income earners aren’t immune to the effects of a prolonged recession. “High-income consumers are more exposed to financial assets - the thing to watch here is the stock market and housing prices,” says McDonough. “While the stock market is down approximately 20% this year, housing prices have held up. If these both start to decline, then high-income spend weakness could be the thing we are talking about in nine to 12 months.”
1 US Bureau of Labor Statistics. COVID-19 causes a spike in spending on durable goods. November 2021
2 US Census Bureau. Annual Retail Trade Survey Shows Impact of Online Shopping on Retail Sales During COVID-19 Pandemic. April 27, 2022
3 International Trade Administration. Impact of COVID Pandemic on eCommerce. Accessed August 2022
4 US Bureau of Labor Statistics. TED: The Economics Daily. July 18, 2022
5 The Boston Globe. Earnings rising faster for lower-wage workers December 9, 2021
6 The University of Michigan Survey of Consumers. 2002
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