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Economic Update: The Consumer – Goods First, Services Next

By Dr. Uric Dufrene, Sanders Chair in Business and Professor of Finance, Indiana University Southeast

The U.S. economy is driven by the consumer, with 70% of GDP linked to consumer spending. That includes everything consumers spend on durable goods (i.e. RVs, cars, computers, furniture, etc.), non-durable goods (i.e. clothing, food and beverage for off-premise consumption, gasoline, etc.), and services (i.e. healthcare, utilities, food services, financial, recreation, transportation, etc.).

A recent report on retail sales shows that the consumer is spending like it has never in the past. March retail sales were up 9.8% from the previous month. Compared to the previous year, it was the largest increase going back to the early 90s. Although we must be careful how we interpret some of these year over year numbers now because of the deep declines experienced this time last year. That aside, the retail sales number was phenomenal.

If we examine retail sales from February 2020 (just before the bottom fell out), to now, the nation has never experienced the jump in retail sales of that magnitude (at least going back to 1992). Think about that. This takes into consideration the big fall in retail sales last year, and now the climb out of the hole. Please let me repeat for emphasis. The nation has never experienced the change in retail sales observed from February 2020 to March 2021. Since 1992, a similar jump in retail sales has never been observed! For comparison purposes, it took about 3 years to recover lost retail sales during the Great Recession. In the pandemic recession, it took 3 only months!

If we take total personal consumption spending, and divide it by goods and services, consumers typically spend around two-thirds on services and one-third on goods, plus or minus. Those numbers have seen an adjustment in the pandemic. Right now, consumers are spending about 62% on services and 38% on goods. On the goods front, the big winner has been durable goods. Think RVs, cars, furniture, home improvement. Spending on durable goods is usually about 10% of total personal spending. That number has increased to about 16% of total personal spending. Relative to historical patterns, consumers have been spending more on goods than services.

The pandemic percentages between goods and services will not persist. Patterns will normalize, and the economy will revert to 2/3rds spending on services and 1/3rd spending on goods. And not all the cash has been spent on goods. Households are flush with savings. The last report on personal income and spending showed that the savings rate increased to 27.6%. This is the second highest on record; the savings rate increased to 33% last year.

Locally, retail sales employment is down about 2,000 from last year (March 2020 to March 2021). Metro employment in the retail sector had bottomed out in 2010, and was climbing all the way until 2017, peaking at about 65,000. Since 2017, retail employment in the region had been on a gradual decline and landed at 63,000, just before the pandemic hit. Current numbers have metro retail employment at 61,000 (subject to revisions later).

Nationally, there are about 1 million job openings in both wholesale and retail trade, but about 1.3 million in both sectors remain unemployed. Like other employers, retailers are facing challenges in filling positions, and this is likely having an impact on the overall lower number for Louisville metro retail employment. We can get a hint of this by observing the number of Burning Glass job postings related to retail trade and comparing that to the approximate 2,000 retail jobs deficit. In the past 90 days, job postings in retail trade across the metro area exceed 4,000!

A consumer can only use so many computers, sofas, and automobiles. As states continue to reopen, and crowds begin to gather, the economy will see spending on services like it has never previously. The goods component of spending was the early beneficiary of the pandemic, and services will be next. Expect massive spending to flow to services that include experiences, and those that build memories. The challenge to providers will be linked to labor shortages. You may have to wait in line for that restaurant table or your favorite theme park ride.

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