MainStreet Macro: Consumer Mojo

Consumers have a special kind of economic mojo. What people buy, how much they buy and where they buy it – that’s the economy in a nutshell.  

Consumer spending was the first part of the economy to recover after the pandemic, and has been a tailwind to growth ever since. However, recent surveys point to a drop in consumer confidence. There are signs the consumer tailwind is losing some of its strength.  

Sign 1: Goods versus services 

The U.S. economy is overwhelmingly service-oriented. The service sector makes up roughly 80% of the labor market. 

Prior to the outbreak, services made up 69% of consumer spending. . Services (think healthcare, haircuts, and hotel stays) still dominate goods (think cars and computers), but people are spending more on goods and less on services than before the pandemic. 

Spending on services now down to 65%. Spending on goods has risen, from 31 percent to 35 percent. 

Going to movies, traveling on planes, and planning a big wedding celebration all require a degree of confidence in health conditions.  There’s a risk that Main Street’s transition back to normal spending patterns will be stunted by ongoing pandemic concerns. 

Sign 2: Home sales 

Homebuying led the economic recovery early on, but too much demand and too few homes for sale caused prices to surge to record levels. In June, the median sales price for existing homes grew 23% from a year earlier, according to the National Association of Realtors.   

Over time, the dearth of affordable homes on the market is likely to curb at least some of the enthusiasm for home buying even if mortgage rates continue to hover at rock-bottom levels.   

Additionally, chronic shortages in labor and materials, made worse by the pandemic, limit new home construction. 

Sign 3: Retail sales  

Last week, we learned that that retail spending dipped in July, down 1.1% from June. People bought fewer of the creature comforts that have been in demand during the pandemic – fewer cars, books, sports equipment and musical instruments. (My husband bought a trumpet during our Covid-lockdown. I considered buying a cello but opted to binge-watch movies and sitcoms instead.)  

Even though back-to-school shopping season is here and more companies are inviting employees back to the workplace, spending on clothes also dropped for the month.  

That said, Main Street has shown that we’re no longer a nation of homebodies. Spending at bars and restaurants continued to grow and online shopping declined.  

My Take 

Rarely has the psychology of Main street’s shopping behavior been so tied to the economy and the labor market. Yes, confident consumers spend more. However, confidence now hangs not only on economic conditions, but on health and safety, too. 

Confident consumers are more likely to travel, eat at restaurants, and go to movie theaters, which creates jobs in the very sectors that were hardest hit by the pandemic. 

The delta variant and resurging COVID-19 cases in parts of the country have delivered another round of uncertainty to Main Street. Add the tamping down of federal fiscal support in the form of direct payments to households, generous jobless benefits, and cheap loans and loan forgiveness to small businesses, and you get a Main Street economy that is about to fend for itself for the first time since the pandemic began.  

It will have to do so without knowing how persistent coronavirus-related health concerns, higher prices, and widespread supply shortages will be.   

Job gains going forward will depend heavily on whether consumers keep their mojo in the face of these uncertainties.