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NEW HAVEN, Connecticut: When the second shot of the vaccine went into my arm, I could almost taste the instant gratification of deferred wishes. Having done without for almost a year, it was time to treat yourself.
While I was lucky, actually, old enough to be included in the first wave of vaccines, the rest of the United States is about to follow. The possibility that a wider distribution of vaccines will lead to “herd immunity” by the end of 2021 is no longer imaginative.
And with the COVID-19 nightmare ending, the widely discounted argument in financial markets goes, long-time power-starved American consumers can finally relax and enjoy the glorious V-shaped recovery. .
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RECEIVED DEMAND VERY SPENT
The concept of repressed demand is well studied in economics. While typically applied to the consumption of durable goods (automobiles, furniture, appliances, and the like), it has also been used to describe residential construction activity and business investment in plant and equipment.
The idea is based on a basic premise of dynamic demand models known as the “stock adjustment” effect: an unexpected development that causes a deferral of spending on long-lived items with a finite useful life does not mitigate obsolescence (physical or technological) and the associated need for replacement.
It follows that once the outage ends, a sudden increase in postponed or suppressed replacement demand can lead to economic recovery.
Generally, the greater the impact and associated deferral of replacement demand, the stronger the rebound. I tell my students to imagine a large rubber band: the more you pull it, the greater the snapback when you release it.
This works well to explain the temporary impact of what economists call exogenous shocks such as natural disasters, strikes, political upheavals, and wars. It works worst for shocks that can cause lasting economic scars, such as financial crises and, yes, pandemics.
FILE PHOTO: Healthcare staff surround a patient who died inside a coronavirus disease (COVID-19) unit at the United Memorial Medical Center in Houston, Texas, USA, December 12, 2020. REUTERS / Callaghan O’Hare / File Photo
Recent trends in US consumer spending suggest that the natural forces of stifled demand can be largely expended. During the last eight months of 2020, the rebound in durable goods consumption after the lockdown was 39% greater than what was lost during the lockdown in March and April.
As a result, the consumption of durable goods increased to 8.25% of GDP in the second half of 2020, the highest proportion since early 2007 and well above the 7.1% average during the period 2008 to 2019.
There is probably more to come. In the immediate aftermath of another tranche of federal aid checks issued in December ($ 600 per eligible recipient), the 5.3 percent increase in retail sales reported for January, dominated by large gains for durable items such as electronics, appliances and furniture evidence of consumer euphoria.
And with an even larger round of $ 1,400 checks in sight as President Joe Biden’s “American Rescue Plan” takes hold, an additional boost from consumer durables seems likely.
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A STREAM OF CONSUMER SKITTISHNESS
At that point, however, the pent-up demand should be exhausted. This is even more apparent when you assess the extraordinary power of the recent surge in consumer durables relative to the accumulated demand cycles of the past.
Since the early 1990s, the recovery in personal use has been relatively moderate.
But in the seven cyclical expansions from the mid-1950s to the early 1980s, the release of stifled demand boosted the share of consumer durables in GDP by 0.6 percentage points, on average, in the four quarters after the lows of the economic cycle.
From this perspective, the recent increase in the share of consumer durables in GDP of 1.35 percentage points from the low of 6.9% recorded in the first quarter of 2020 is even more extraordinary. With more than double the previous cyclical norm, it is all the more unsustainable.
At the same time, the powerful release from pent-up demand, aided by unprecedented support from fiscal and monetary policies, is masking a persistent undercurrent of consumer nervousness that is likely to endure long after most of the population from the US Get vaccinated.
FILE PHOTO: Travelers wearing protective masks to prevent the spread of the coronavirus disease (COVID-19) claim their luggage at the Denver airport, Colorado, USA, November 24, 2020. REUTERS / Kevin Mohatt / Photo archive
The so-called long shadow of previous great pandemics provides a broad historical precedent for this scenario.
So does recent data showing signs of scarring in the service sector, especially in activities that require face-to-face contact, such as travel, leisure and entertainment.
Vaccines or not, face-to-face interactions are at odds with a now deep-seated awareness of personal health risks likely to influence consumer behavior for years to come.
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THE SERVICES STILL CONTAINED
That’s what the numbers show. Unlike the powerful rebound in consumer spending on durable goods, the post-lockdown rebound in services from May to December 2020 regained just 63 percent of what was lost during March and April.
Unsurprisingly, services, which account for just over 60 percent of total U.S. consumption, are being held back primarily by face-to-face activities such as transportation (travel), recreation (leisure), and restaurant dining.
Together, these three spending categories, which accounted for 61 percent of the lockdown-induced decline in total consumer services, remain 25 percent below their peak in Q4 2019.
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This same wavering demand for consumer services is reflected in comparable trends in the US job market. While there has been a significant pickup in hiring since the closures were lifted last spring, total non-farm jobs are still 9.9 million below the February 2020 peak.
Again, the reason is not surprising. 83% of this deficit has been concentrated in face-to-face private services such as transportation, entertainment and hospitality, accommodation, food services, retail, film and sound recording, and non-public education.
FILE PHOTO: Servers pack food onto a table at a pop-up restaurant set up in Times Square for ‘Taste of Times Square Week’ during the coronavirus disease (COVID-19) pandemic in the Manhattan borough of New City York, New York, USA, October 23, 2020. REUTERS / Carlo Allegri / File Photo
New research points to more of the same: Headwinds in post-COVID-19 services are likely to be an enduring feature of the US job market.
Thus, despite the predictable release of pent-up demand for consumer durables, face-to-face services show clear evidence, in terms of both consumer demand and employment, of permanent scars.
As a result, with the decline in stifled demand for durable goods approaching depletion, the recovery of the post-pandemic US economy is likely not to catch up with the “turning speed” of vaccine development.
Stephen S Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: the codependency of the United States and China.
