Free money whipped consumers into a rollicking eight-month splurge on goods. There’s nothing “pent up.” And services are not a shoo-in for “pent-up demand.”
By Wolf Richter for WOLF STREET.
Give Americans some free money, and tell them it’s their duty to buy some stuff with it, preferable stuff imported from other countries, and they’ll buy some stuff with it, big and expensive stuff too, and they did buy a lot of stuff with it, more than they’d ever bought before, and their homes are full of stuff they bought in this eight-month long record rollicking free-money spending spree.
And it happened again in January: Free money from the stimulus payments kicked in and consumers further boosted their spending on goods from already high levels.
In January, spending on durable goods spiked by a stunning 18.6% from a year ago, according the Bureau of Economic Analysis today, to a seasonally adjusted annual rate of $1.86 trillion. The spending spree has been going on since June:
And spending on nondurable goods – which includes food and gasoline whose prices have jumped recently – rose by 6.1% from a year ago to a record of $3.21 trillion (annual rate):
This is an entirely different scenario than what consumers went through in any prior crisis. During the Financial Crisis, consumers suddenly cut their purchases of durable goods and nondurable goods, which you can see in the charts above.
Spending on durable goods plunged by 19% from the peak in October 2007 to the trough in April 2009. This plunge in spending did create some pent-up demand during the recovery.
Nondurable goods during the Financial Crisis dropped by 10% from the peak in July 2008 to the trough in March 2009. Some of this drop in spending had to do with the collapse in the price of gasoline, and also the reduced driving because people were out of work. Prices of food and other items too fell for a few months during this time, which, though welcome by consumers, caused a dip in the dollars spent on these items. This kind of drop in spending on nondurable goods creates only moderate pent-up demand, if any.
But during the Pandemic, the opposite happened.
People got lots of free money from the stimulus and extra unemployment programs. The most recent $600 stimulus payments started showing up in consumers’ bank accounts at the end of December, and massively arrived in January.
Income from wages and salaries in January, at $9.7 trillion (seasonally adjusted annual rate), was up 1.1% from a year ago. But income from unemployment benefits, stimulus checks, and other government support payments exploded to $2.9 trillion (seasonally adjusted annual rate).
Along with income from interest, dividends, rental properties, farm income, income from Social Security and other transfer payments, total income in January, all together, jumped by 13% from a year ago to a record $21.5 trillion (seasonally adjusted annual rate). These stimulus payments made for a majestic free-money-based overshoot:
In addition to the free money…
Millions of homeowners didn’t have to make their mortgage payments because they’d entered their mortgages into forbearance programs. At one point, 4.3 million mortgages were in forbearance, according to the Mortgage Bankers Association. Currently, 2.6 million mortgages are still in forbearance. Federal student loans were automatically entered into forbearance programs, and borrowers didn’t have to make payments. Eviction bans allowed strung-out households to spend some money on things other than rent.
There was a huge boom across the financial markets, and those with assets felt a lot richer and might have spent more; and to top it off, a cash-out refinancing boom, driven by record low mortgage rates and surging home prices, turned homes once again into ATMs.
All of these factors – and others too – contributed to the record amount of spending on durable and nondurable goods, and now people have this stuff around the house.
Demand for consumer goods wasn’t “pent up.” It was all let out.
This time around, households didn’t go through two years of cutting back on goods purchases, as they’d done during the Financial Crisis.
This time around, there is a shortage of supply, including the now infamous semiconductor shortage, due to the surge in spending on goods, and inventories are tight, amid production snags and supply-chain problems. And given this demand, and the supply issues, prices of goods are rising.
Consumers have been awash with this money they didn’t need to work for. And they paid down credit card debts with it. And they spent part of it on goods.
Now another stimulus package with more free money is being prepared in Congress. If it passes, more free money will rain on consumers over the next two or three months.
What will come when this crisis settles down, and when this free money fades, is a scenario where consumers have bought all the goods they wanted to buy. That’s the opposite of pent-up demand.
Spending on services is still a drag.
In the Good Times, services accounted for nearly 70% of consumer spending. Services include rents, mortgage interest payments, health care, education, insurance, hotel bookings, plane tickets, cellphone services, broadband, streaming services, the electricity bill, haircuts, plus a million other services.
Spending on some of those services has boomed during the Pandemic. But other services, such as hotel bookings, tours, cruises, flights, tickets to ballgames or entertainment venues, have gotten crushed, and total spending on services in January was still down 5.3% from a year ago, and at $9.75 trillion (annual rate), has seen little improvement over the past five months:
But when this crisis settles down, and when the free money fades, how many additional vacation trips are people going to take to make up for the three trips they missed? How many additional haircuts are they going to get to make up for the missed haircuts? How many additional ballgames are they going to attend to make up for the ones they’d missed?
Surely, there will be some pent-up demand in services. But that’s the issue with services: Unlike durable goods, they don’t lend themselves to massive bouts of pent-up demand. And as the free money fades, consumers return to the customary zero-sum game: money spent on services cannot also be spent on goods.
What all this free money has accomplished is that it overstimulated spending on consumer goods. And once consumers can spend money on vacations and ballgames again, I would expect their spending on goods to sag from the historically high levels, creating the opposite effect of pent-up demand for goods, while services, if lucky, might just wobble back to trend.
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