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Partial Recovery in U.S. Consumer Spending

Consumer spending is one of the favorite metrics to interpret economic recovery during a crisis. Perhaps the metric has never been more useful than during the coronavirus crisis.

The consumer is the growth engine in any economy. If the money is stashed under the mattress, meaning the consumer is not spending, but saving, the economy will have a hard time to recover. Thus, it is all about trust and reducing uncertainty in an economy’s ability to recover, in the government’s ability to provide support if needed, in the medical services’ ability to cope with the pandemic, and so on.

When the consumer feels safe again, spending will rise again to pre-pandemic levels. Until then, all economists have to do is to interpret the upcoming data and see what sectors suffer the most.

Recovery From April to July, But There Is Still Room for Improvement

The U.S. monetary and fiscal authorities reacted very strongly to the crisis. The Fed pushed the funds rate close to zero while increasing quantitative easing, and the Congress delivered fiscal stimulus in the form of weekly checks.

Yet, while the M2 money supply increased exponentially, the velocity of money declined. Until this ratio does not reverse, consumer spending is difficult to reach pre-pandemic levels.

Some encouraging signs do exist. Data from April through July shows notable improvements in recreational goods and vehicles, as well as in furnishing and household equipment. However, recreational services, food, and accommodation, clothing – are all lagging. In fact, the likelihood exists that they will not recover the lost ground as long as the pandemic exists.

If we are to sum up the data,  spending on goods over the period is 7% higher while spending on services is 10% lower. In a way, it is only normal – April was dysfunctional, with many states under various forms of lockdowns. Services, therefore, had a hard time to rebound.

Moreover, if the trend seen in Europe is to reach the United States (more limitations for outdoor activities due to a resurgence in cases), the services industry will further have to suffer. However, there is a wild card to consider when looking at the U.S. data and the months ahead – the U.S. election.

More stimulus is likely, as well as new promises from both candidates. However to convince consumers to spend again, the candidates should focus on the pandemic and its side-effects, rather than economic stimulus that would just be stashed away until people regain their trust in the future economic growth in the United States.

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