MainStreet Macro: Gummed up?

Is there a signature purchase you’ve made during the pandemic?  For me, it was adopting my happy-go-lucky pup, Lavender.

Pandemic spending habits are front and center this week, when we get data on two major measures of economic health – consumer confidence and spending.

Consumer spending has led the pandemic recovery. But consumer confidence took a hit recently, when the delta variant led to a surge in coronavirus infections and renewed anxiety about health conditions. 

The trajectory of spending — will it slow or remain resilient? — is the number one question facing the economy right now.

Household finances look great on paper, but people still are adjusting to our new world. And pandemic-induced supply shortages, price increases, and job market confusion are stuck to the economy like gum on a shoe on a hot day.

Is consumer spending gummed up?  Let’s find out.

1. Income

The typical U.S. household earned roughly $2,000 less in 2020 than it did in 2019. It was the first significant decline in household income since 2011, in the wake of the financial crisis.

Source:  US Census

Income matters, obviously. But the distribution of wages matters, too. Put differently, the less money you make, the more likely you are to spend what you have. For a consumption-based economy like ours, a drop in income is a double-whammy. Not only is there less money to spend overall, even wealthier people with the wherewithal to buy things aren’t as likely to spend what they have.

2. Debt

Corporate and government debt soared by double digits last year.  Households, however, told a completely different story: Debt grew by less than 4% in 2020.

Household debt as a share of disposable income is sitting comfortably at about 8%, well below the historical average.

Not only have consumers paid down their loans and credit cards, they’ve increased savings. The personal saving rate now is higher than it was before the pandemic.

3. Wealth

Household net worth reached a record high of $142 trillion in 2021, driven by soaring home and stock values.

Home equity grew by $3 trillion in the second quarter from a year earlier. That’s the biggest dollar increase on record.

Consumers, almost literally, are sitting on a pile of cash.

On Wall Street, the S&P 500 jumped by nearly a third during the pandemic, reaching another record high last week and boosting Main Street retirement funds.

All that increased wealth doesn’t necessarily mean consumers will spend more. As with incomes, the wealthier Main Street gets, the more likely it is to save and invest than spend. 

My Take

Consumers are bummed out. The delta variant took the shine off of the economy’s mid-summer reopening after many cities backpedaled on relaxing safety protocols.

Higher prices and inflation worries, too, have dampened optimism. The risk is that as confidence falls, people pull back on spending, which limits economic growth.

Yet for now, people seem to be spending despite their reservations.

Retail sales from July through September were up 15% even as the delta variant was driving an increase in Covid-19 cases. People dialed back on in-person services, but they bought more goods.

This is also was the period when pandemic-related government support programs, including extended unemployment benefits and direct payments to households, were ending. 

So the news of this week is this: Despite a challenging year, the backbone of the U.S. economy – the consumer – is well-positioned to continue to support economic growth.

A caveat: Consumers are hardy, not invincible. The drop in household income is a vulnerability. If it doesn’t reverse it could gum up an otherwise resilient Main Street economy.