The COVID Consumer-Spending Curveball
And the future of inflation
Consumer spending makes up ~68% of GDP (one way to measure the economy). The rest is a mix of government spending, investment, and housing.
As much fighting there is in Washington, DC, most government spending is already decided; investment doesn't change too much; housing ebbs and flows, but it's the smallest component- at ~4%.
Consumer spending breaks down between services (eating out, hotels, etc.), durable goods (items that last more than three years: cars, furniture, etc.), and non-durable goods (food, office supplies, items used immediately).
Right before COVID, we were spending on a monthly basis: $10Billion on services, $3B on nondurable goods, and $1B on durable goods; so, about 2/3 on services and 1/3 on goods. This proportion has held steady for the last 40 years.
Paying attention to what consumers do with their money can tell you a lot about what's going on in the economy. And, boy, did it change with COVID.
During previous recessions, consumers' spending had a consistent pattern- we cut back on goods (durable goods take a bigger hit than nondurable), but services spending remains mostly stable. Below are the last three recessions before COVID. Red is Services, Green is nondurable goods, and Blue is durable goods:
This intuitively makes sense. When times get tough people cut back on durable goods. After all, durable goods are supposed to last more than three years. You can wait on those purchases.
The opposite happened during COVID:
Durable goods exploded and services were obviously hampered by lockdowns and social distancing. This spending change is the main driver of inflation over the last year. (Covered that here at the end: Inflation and The Fed ). The LA/Long Beach Port is the biggest in the US. It is importing 27% more in 2021 than it was in 20201 . And it still can’t move cargo fast enough through its port. That’s pretty wild!
Inflation
Now for the big question….dun dun dun…what happens with inflation?! Eventually, the supply chain will fix itself. My thoughts are around what happens when spending normalizes? We won’t keep buying all of this stuff, right?
Service spending will bounce back. On top of that wages in the service sector are increasing. My guess (and I cannot wait to find out why I’m wrong) is that goods inflation moderates, but services inflation starts to tick up. Inflation will come down from its ~7% and will stick around 3-4% for the next year or two.
Keep in mind, there will be “base effects” in the data. Meaning comparing things on a one-year lag will distort the data. As the big increases from goods fall off from the one-year number it will cause weird distortions in the official numbers.
https://www.portoflosangeles.org/business/statistics/container-statistics/historical-teu-statistics-by-fiscal-year