By Mike O’Donnell
The strength of our economy is largely dependent on consumer spending. Almost 70% of the nation’s Gross Domestic Product (GDP) is a function of “consumer spending”, and this, in combination with “business investment”, “government spending”, and “net exports”, is the definitive measurement of total economic output for the United States.
A positive GDP indicates that the economy is growing. (And a positive “Real” GDP number shows that that the economy is growing faster than the inflation rate, but that is a topic for a different blog.)
As we approach the end of 2020, it is worth looking a little more closely at how this pandemic and the fallout from business closures and extended lockdowns have impacted consumer spending and what that means for the nation’s economy in 2021 and beyond.
The Bureau of Economic Analysis (BEA) within the U.S. Department of Commerce tracks how much people spend, on aggregate, as part of the “Personal Income and Its Disposition” series. This series shows how much people collectively earn from all sorts of different sources and if you subtract taxes and other mandatory payments, like contributions to social security, from this number, you get total personal disposable income for the nation.
There are only two things someone can do with personal disposable income: you can either spend it, identified as personal consumption, or save it, identified as personal savings. How the relationship between these two has been playing out during the pandemic, is fascinating.
|2018||2019||Q1 2020||Q2 2020||Q3 2020|
|TOTAL Personal Consumption||$13,993.3||$14,544.6||$14,545.5||$13,097.3||$14,394.2|
|TOTAL Personal Savings||$1,237.3||$1,231.2||$1,595.3||$4,770.8||$2,859.3|
Numbers are in billions of dollars, and 2020 quarters are seasonally adjusted at annualized rates. Source: BEA
For 2019 over 2018, total personal consumption in the United States increased by approximately 4% nationwide with spending on goods accounting for 31% of all expenditures and spending on services 69%. Total personal consumption fell during the pandemic with service sector businesses taking the brunt of that downturn. Spending was better but still low in Q3 2020, when many service providers were able to reopen again, but annualized national spending is still running at pre-2018 levels and at those levels it is certainly likely to wipe many younger and marginal service sector businesses off the map.
The most significant changes, however, are evident in the nation’s savings rate which has peaked at levels never ever seen before.
Prior to the 1980’s, Americans typically saved more than 10% of their disposable personal income each year. Consumerism, beginning in the mid 80’s, took off with a vengeance and as people began to spend more and save less, the savings rate gradually fell to around 5%, hitting a low of 2.2% in 2005. Then the wheels fell off the economy. Consumers did learn a few lessons during that “great” recession and afterwards the saving rate did noticeably improve to around 8% or so (the fiscal cliff and government shutdown in 2012 notwithstanding).
But the savings rates we’ve seen in the U.S. since the pandemic arrived last March are unprecedented. Even the most recent October rate of 13.6% is a saving metric we haven’t seen in the last fifty years.
What does all this mean?
Well, there is obviously more uncertainty associated with this recession than any other in living memory. People are trying to be careful and build some sort of rainy day cash fund, albeit late in the game, just in case things get even worse than they already are.
Unemployment is high, and will likely stay high through the next few years. More families will be financially challenged than at any time in the last decade so people are trying to save more if they can.
And if people are saving more, they won’t be spending as much as they used to, particularly on services, so many community-based small businesses will likely struggle or even go out of business, causing the recession to further deepen.
Nevertheless, as we move beyond this recession in a few years, it is likely that Americans will remain more cautious about the future and this will result in a new and higher national savings rate, settling closer to or above 10%.
With consumers thus spending less, all those businesses catering to consumers, even Amazon, will sell less. This means that those firms that in turn mostly sell to those businesses, will also sell less.
So for those of you thinking you will wake up on January 1st 2021 and everything will be back to the way it was on January 1st 2020, it won’t. The road to this recovery will be longer and slower than ever before.
Please stay safely seated and keep your arms and legs inside the vehicle as we approach 2021.
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Mike O’Donnell is an entrepreneurial ecosystem builder who is passionate about all things entrepreneurship and the creation of meaningful, sustainable living wage jobs as the solution for the recovery of the U.S. economy from the current, pandemic-induced recession. He is the head of a newly created mission-based nonprofit corporation whose objective is to expand access to capital to underserved and underestimated populations across the United States. An economist by education, Mike lives on the nerdy eastern side of the state of Colorado and is always fascinated by how the world works. Or, in some cases, doesn’t.