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Never A Dull Moment in the World of Economics

January 4, 2021 | Posted in: Insights, Investing

The pandemic has provided us with a powerful reminder that unpredictable human behavior makes it very difficult to forecast the economy. You may recall that during the economic contraction associated with the lockdown, there were a variety of forecasts as to the trajectory of the recovery including U, V, W, and K shapes. To illustrate just one of the variables, I penned a blog in August focused on the fact that the personal savings rate had risen from its normal level of about 7% to 33% in April. That seemed both astounding and illogical but it actually made sense upon further reflection because those who were still employed basically had no place to spend their income. The savings rate has since fallen to about 13%, but it is entirely unclear whether it will return to pre-pandemic levels. Since the consumer represents about two thirds of the economy, decisions as to consumption versus saving have a major impact.

More recently, there has been another surprising trend. Consumer spending fell almost 19% between January and April, but with gains in employment, is now closing in on the January peak. However, the composition of spending is fascinating. Given continuing restrictions on restaurants, movies, and travel, spending on services remains about 6% below January 2020 levels. Spending on non-durable goods which includes items such as food and apparel is actually up about 3%. But the real surprise is spending on durable goods which has increased 14% year-to-date. This category consists of items such as automobiles, appliances, lawn and garden equipment, and consumer electronics. A good deal of this growth is attributable to the surge in the housing market. The number of new houses sold has increased by 30% in 2020, and the inventory of unsold homes correspondingly declined 34%. Average home prices are up about 7%. Given restrictions on movement and social distancing, these statistics are incredible.

Until this year, there had been a sixty-year trend in which services increased from 45% of consumer spending to 69%. My best guess is that there is significant pent-up demand for services which will lead to a strong recovery in that category as the pandemic winds down. However, there are many unanswered questions regarding the continued demand for housing and durable goods, the outlook for cities versus suburbs, the nature of work, and so on. And, the answers to these questions will strongly impact the trajectory of the economy, and perhaps, the capital markets. Stay tuned!