Here’s some advice for living after the pandemic: reserve the restaurant well in advance, prepare to pay for the flight, get used to watching your team from the cheap seats, and dive into the even earlier Film on.
The break-in caused by Covid-19 was different from everyone else because consumer spending on services, which usually hold up well in downturns, is crater-like and remains well below pre-pandemic levels. If the crisis eases – something that hopefully will happen later this year when more people are vaccinated – the recovery could be impressive.
It’s a matter of guessing how sharp that rebound will be. While the U.S.’s limited experience of declining spending on services suggests a recovery will be modest, Americans’ longing to make up for all the things they missed out on during the pandemic – and the copious savings many of them now have – suggests have – towards something else. The country may be on the verge of a recovery in demand for services that it will find difficult to meet.
Whatever the actual outcome, it will set the course for the economy. Spending on services accounts for about half of US gross domestic product, while more than four in five US jobs are in the service sector.
Typically, recessions are triggered by poor spending on goods – things that range from socks to SUVs. That’s because, while Americans spend much more on services than goods, big ticket items in particular are easier to forego when problems arise. This downturn was different not only because spending on services fell, but because, aside from a brief period of weakness last spring, Consumer spending on goods flourished as Americans bought items like cars and washing machines in response to the pandemic. In the fourth quarter, figures from the Department of Commerce show that inflation-adjusted spending on goods rose 7.2% year over year, while spending on services fell 6.8% over the same period.
The early stages of economic recovery are usually determined by spending on goods. That’s because a lot of pent-up demand that built up during the recession will be released when people finally replace their old washing machine, for example.
Spending on services has not increased much in recent recessions, partly because it has not usually been weakened much. Nor are there the same pent-up demand dynamics as there is for goods. For example, families can resume their trip to the restaurant on Friday nights, but they won’t add another evening every week to make up for any lost meals at the restaurant.
But things could be very different after a pandemic that left people largely homelike for almost a year. Compensating for lost haircuts won’t happen, but eating out more, going to the movies more often and playing more ball games seems likely when people feel like the coast is clear. It also seems doable to book longer vacations and take more flights to make up for lost time with a distant family.
In addition, many people have ample money to spend thanks to the combination of reduced spending during the crisis and incomes increased by government relief controls. Federal Reserve figures show households had $ 2.2 trillion more in cash at the end of the third quarter than they did at the end of 2019. Given the increased savings rate and another bailout package now going through Congress, that’s just it that number will likely grow.
“There’s a lot of extra money in people’s pockets and people will use it,” said Deutsche Bank economist Peter Hooper.
Much of that is in the hands of those higher up in the income stream – wealthier Americans who found it easier to keep their jobs during the pandemic. These are also the people who spend the most on discretionary services. In 2019 Ministry of Labor figures show that households in the top 10% of income spent more than twice as much on meals outside the home as middle-income households and more than three times as much on entertainment. So, as service spending recovers, the biggest leaps in demand will be in areas like this, as well as in travel-related categories like air travel and hotel rooms.
This could be good news for some of the many service workers who remain unemployed. More than two million fewer people work in restaurants than they did before the pandemic, and with luck, a large proportion of them will be back in work. Even so, “you will run into supply bottlenecks with some things,” says Ellen Zentner, an economist at Morgan Stanley.
For example, there are only so many rooms in a hotel and only so many people that can fit on an airplane. So expect some prices to go up.
Ultimately, however, it depends on how quickly and how quickly the services recover, how quickly the pandemic resolves, and how quickly people feel good again. There are hopeful signs, including a recent decline in Covid cases, but also causes for concern, such as the emergence of new coronavirus variations that vaccines are currently being used against may not be as effective.
The sooner the country gains control of Covid, the better the service sector and economy will look. Just get ready to spend some of the extra money you put away.
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