A spring in consumers’ steps: Americans prepare to get back to their spending ways

Vacations went for a spin in 2020 while groceries and home gyms hogged the limelight

Fears of the virus and social distancing meant that consumers avoided places where the possibility of crowding or sharing space with those who are not part of their families is high. Deloitte’s survey of consumers reveals that between April and May 2020, only 23% respondents⁷ felt safe taking a flight while just 29% felt safe staying at a hotel. And although the figures increased slightly through the year, the rise wasn’t much. The survey also reveals that most consumers remained wary of visiting food services places and attending in-person events (figure 3).

Consequently, certain forms of services spending suffered deeply. PCE on recreation services fell by 31.8% last year, while spending on food services and accommodation dipped 21.8%. People also avoided communal travel such as public transport, taxis, and airplanes—total ridership in public transportation fell by 50% in the first three quarters of 2020 compared to the same period a year before.⁸ Consumer spending on transportation therefore fell sharply last year (figure 4). Spending on housing and utilities services, however, maintained a steady growth as people preferred to stay indoors and many worked out of their home offices.

Among durable goods, the biggest surge in spending was on recreational goods and vehicles (18%) as people opted to set up their home gyms rather than step out for workouts. Figure 4 also reveals that the need to set up or augment home offices meant an increase in spending on furnishings and other durable household equipment in 2020. Within nondurable goods, spending on food and beverages grew by 6.9%, up from the previous year’s 1.7% rise—the pandemic not only made people stock up on groceries but fewer visits to restaurants meant more cooking at home.

Winds of change as vaccinations rise

Vaccinations have changed the game over the last few months, turning anxiety that persisted in 2020 into a sizeable ray of hope. As of June 4, 41.4% of Americans are fully vaccinated, while another 9.7% have received their first of two doses of a vaccine. With vaccinations rising, daily virus cases and deaths due to COVID-19 have gone down, which, in turn, has reduced anxiety and concerns about health.⁹ In Deloitte’s latest survey in end-May, 48% of consumers were concerned about their health and well-being, one of the lowest figures since the survey started in April last year.

With lessening anxiety has come a change in mood: Americans are eager to get back to meeting each other, head to their favorite restaurants and pubs, go for vacations (figure 5), and return to their offices. For example, in Deloitte’s latest survey, 68% of respondents said that they feel safe to return to their workplaces, the highest figure since the survey started.

Services spending has started to benefit as health-related concerns ease. In March, PCE on services grew year over year for the first time in 13 months and rose 19.3% in April, although part of the surge that month is due to a low base in 2020. Spending on services, however, is still 4.7% lower than what it was in February 2020 (before the pandemic) compared to strong growth in spending on durable goods (30.8%) and nondurable goods (9%) during this period.

Consumer spending set for strong growth during 2021–2022

With fears of the virus declining due to rising vaccinations, it is likely that the country could edge back to the prepandemic normal by the end of this year. As businesses offering consumer services ramp up after more than a year’s struggle with the virus, labor market woes will ease further. Employment has been recovering after the staggering 14.3% drop in April 2020, with job gains averaging about 1% per month in the 13 months since then. With the economy expected to gather momentum, the labor market will continue to benefit as it tries to inch back toward prepandemic levels—employment in May was still 4.5% less than what it was in February 2020, a month before the pandemic hit. Many consumers may also have a large amount of savings to deploy as economic and health scenarios improve further. We calculate that consumers saved about US$1.6 trillion more than what they would have saved had there been no pandemic.

Consequently, as highlighted in Deloitte’s latest United States Economic Forecast, PCE is likely to increase by 7.6% in 2021 and by 3.9% in 2022, a sharp change from the 3.9% contraction last year.¹⁰

• Services will be back on the menu: Leading the surge in consumer spending will be services as consumers flock back to their favorite pubs and restaurants, spend on travel and vacations, and enjoy sporting events as they did before the pandemic. It is likely that pent-up demand will also play a part as consumers deploy some of their savings to make up for all the travel and leisure activities they missed out on in 2020. As some workplaces open after more than a year-long hiatus, demand for transportation services will likely rise, although this is likely to face challenges from any hybrid work model where employees spend part of their work week in office and the rest remotely. Overall, services spending is likely to expand by 6.2% in 2021, with the momentum likely to accelerate from the latter half of the year into 2022 (figure 6).
• There’s only so much of gym equipment and furniture you can buy: Durable goods, the mainstay of consumer spending in 2020, is likely to fall from favor over the next year as people shift spending to services. Also, unlike spending on a family vacation or going to a baseball game, there’s a limit to the amount of durable goods a consumer can buy. Replacing one car with another every year or adding furniture at home frequently holds little sense. Similarly, spending on gym equipment will also likely ease. And as the threat of lockdowns declines and people also spend more on eating out, stockpiling groceries and essential household goods won’t be the norm anymore. Consequently, growth in spending on both durable and nondurable goods are likely to ease this year and the next (figure 6). In fact, given the stockpile of durable goods accumulated through most of last year and part of 2021, spending on durable goods is forecasted to contract in 2022.

Headaches from headwinds?

Cheerful as the forecasts seem, especially relative to 2020, consumer spending faces key headwinds. First, the labor market is not yet out of the woods with employment far short of prepandemic levels. There were 7.1 million fewer people working in the economy in May this year compared to February 2020. And labor force participation at 61.6% is close to two percentage points lower than prepandemic levels. Without these people coming back to the labor market and finding jobs, consumer spending growth may suffer over the medium to long term.

Second, low-income households will face challenges in ramping up spending given the pandemic’s disproportionate impact on them.¹¹ As of May 2021, employment in low-wage occupations¹² was still 5.4% lower than that in February 2020, worse than the declines in medium-wage occupations (4.2%) and high-wage (2%) ones.¹³ Low-income households are also less likely to have health insurance—especially after layoffs—and more likely to have health conditions that complicate recovery from infection.

Third, spending by retirees will come under pressure as retirement income falls due to low interest rates. Retirement savings, an indicator of future spending by retirees, has been hit due to the impact of the pandemic on labor markets and is unlikely to recover fast if the participation rate does not return to prepandemic levels soon. Even before the pandemic, fewer than four in 10 nonretired adults thought their retirement was on track, with one-quarter of nonretired adults saying they have no retirement savings.¹⁴ And the great majority of Americans’ balance sheets have not benefitted from the recent stock market boom.¹⁵

That the impact of the pandemic on people’s incomes and finances is deep and continuing is evident from latest trends in Deloitte’s consumer survey, which shows that the share of respondents attributing their anxiety to financial stress has been edging up since January. In fact, in the latest survey, 48% of respondents cited financial stress as the reason for greater anxiety in the survey week, higher than even the share of those who blamed COVID-19 (41%).

Some shifts in spending may stay for long

The post–COVID-19 world will have a lot in common with the one we lived in before the pandemic, but some things may change permanently.¹⁶ This will likely impact consumer spending patterns over the medium to long term.

• The future of work may well turn out to be a mix of in-person, remote, and hybrid work. Such a change will likely nudge consumers to head more to single-family homes in the suburbs than multi-family units within the city. A shift to larger homes with adequate space for home offices will translate to higher spending on home office furnishings and home utility services compared to prepandemic levels.
• Life in the suburbs may also lead to a rise in car ownership due to mobility requirements. Also, people—even those living within a city—may prefer to have their own set of wheels as they may feel safer traveling alone rather than share space with people outside their households. Most consumers are therefore unlikely to engage as much in ride-sharing and mass transit than they did in 2019.
• A study of responses from Deloitte’s consumer surveys over May 7–26 reveals that even as the health-related uncertainty over the pandemic eased, respondents who are more likely to engage in remote work in future appear more intent to cook at home, engage in online shopping, and enjoy streaming services compared to prepandemic levels (figure 7). Figure 7 also reveals that people are keen to travel more and eat out as the health scenario improves further.
• If financial inequality—exacerbated by the pandemic—doesn’t go down over the next few years, the divergence in spending baskets between those at the top of the income and wealth ladders, and the ones at the bottom will only widen. Those at the bottom may find it even more difficult to spend on health care, insurance, retirement, and transport.

We can safely assume that such changes will have an impact on the amount, nature, and even mode of consumer spending. Changes to the way people work and live, for example, will ensure that demand for durable goods will remain healthy even three to four years from now. That’s why we expect spending on durable goods to bounce back during 2023–2025 after a likely correction in 2022. Similarly, the switch to online purchases during the pandemic is likely to sustain even though most consumers feel safe to visit stores and restaurants now, as figure 7 shows.¹⁷ However, it’s hard to predict the extent of such changes and whether they will persist beyond this decade. Economists will be able to paint a clearer picture only when the nature of the postpandemic world becomes more evident.