Will Consumer Spending Return to Pre-Coronavirus Levels?

April 28, 2020
Author: Glenn Hunter

We’re living through the “mother of all financial crises,” and a downturn in the U.S. economy — a steep one — is underway. Recovery will depend entirely on the attitudes and behaviors of consumers, whose spending accounts for 70% of U.S GDP. But predicting how and when consumers will loosen their purse strings again is informed guesswork, because the population continues to worry about getting sick and possibly losing their jobs, if they haven’t already.

Nonetheless, we do have some clues about previous economic disruptions that could point the way. The historical situation most closely resembling COVID-19 was the 1918-1920 Spanish Flu pandemic, which took as many as 675,000 lives in the U.S., at a time when reliable economic data was scant.

During economic uncertainty, most people spend less and save more.

According to a study by the Federal Reserve Bank of St. Louis, many organizations, including service- and entertainment-oriented businesses, “suffered double-digit losses in revenue” as a result of the Spanish Flu. Other businesses that specialized in healthcare products experienced an increase in revenue. Fortunately, the study states that the economic disruption from that particular outbreak was short-lived (i.e., the Roaring 20s).

Related: Rebound: 3 Recovery Scenarios for the U.S. Economy

Fast-forward to the 21st century and the Great Recession, when the financial crisis of 2007-2008 caused consumers to begin pulling in their horns. “Cheap was in,” as buyers looked for retail bargains (more and more of them online), began paying down personal debt (which had risen to nearly $13 trillion) and seriously started saving. The personal savings rate rose during this period, from roughly 3.5% in 2007 to 8% by 2019. But by 2019 consumer debt also was creeping back up to worrisome levels – this time to a whopping $14 trillion, in part because of an increase in student loans.

Saving Money and Spending Practically

If history is any guide, today’s consumers may well follow the post-Great Recession pattern in the wake of COVID-19. Their confidence now is badly shattered. On April 28, The Conference Board said its much-watched consumer confidence index plummeted to 86.9 for April, down from 118.8 in March. April’s number was the lowest in six years. A few days earlier, the University of Michigan Consumer Sentiment Index for April came in at 71.8, its lowest since 2011.

With unemployment at modern-record levels and headed higher, individuals are now being advised to build up their emergency funds, if possible, to have enough money in reserve to cover three to six months’ worth of expenses. Millennials especially are likely to be aggressive savers in anticipation of another downturn, and this will slow overall consumer spending. Americans are being counseled to buy less expensive cars, downgrade their cellphone plans and skip expensive meals. As a result, what spending they do – at least in the near term – is likely to be mainly for necessities, like groceries, housing, and bill-paying.

Once businesses start reopening en masse, people will return to getting haircuts and snapping up staples like cosmetics and clothing. Even so, the consumer economy won’t necessarily come roaring back “like a rocket ship,” despite President Trump’s prediction. Instead, one marketing professor told the Los Angeles Times, there’s apt to be “an enduring shift toward tightwaddism.” Said another, “Even though there will be pent-up savings, demand and desire for experiences, it may take a while before people feel comfortable acting on it.”

Thomai Serdari, a luxury marketing and branding professor at New York University, told Retail Dive, “I think people are going to realize they don’t need as much.” So, any return to pre-pandemic spending patterns, if it comes at all, would probably take some time.


In the interim, how are various industries, product and services apt to fare?

  • Retail. Accelerating a trend that was already underway, buyers will continue flocking to online commerce and away from brick and mortar stores, partly due now to social-distancing concerns. Hand-in-glove with this hesitancy, it’s predicted that few major department-store chains may even survive the downturn, and middle-class retailers like Belks are likely to shrink their store footprints. Discretionary spending is apt to be for practical things, like home improvement projects and products focused on hygiene and wellness, except by the wealthiest consumers. Morningstar anticipates that the fall-off in luxury-goods sales will be relatively short-lived – 6% in 2020 versus 11% during the Great Recession – given strong pent-up demand by upscale consumers for expensive watches, jewelry and other accessories.
  • Restaurants. Analysts and operators in this space say as many as 75% of smaller independent restaurants may not have the wherewithal to reopen. Big corporate chains, on the other hand, should do fine. Many eateries may downsize to meet new expectations about social distancing, and the establishment’s cleanliness will become more of a priority.
  • Healthcare. Telemedicine, which has taken off with the pandemic’s social-distancing mandates, will become even more popular with consumers.
  • Travel. U.S. airlines took three years to recover after the 9/11 terrorist attacks and two years following the Great Recession. This time, experts told Vox, it may be five years before air travel returns to the record-high levels it enjoyed earlier this year. Expect domestic travel to rebound first, with international flights to follow. Travel growth could also be slowed because, post-pandemic, companies may realize it’s much more economical to hold business meetings via Skype or Zoom rather than in-person.
  • Entertainment. Look for spending on theaters, concert venues and gyms to come back only gradually. But stay-at-home options, such as streaming services like Netflix and Amazon Prime Player, recorded music, videogames and e-sports all will continue attracting consumer interest and dollars.

Consumer sentiment, in the near-term at least, seems to have been crystallized by Candy Christian, 66, of Hemet, California. Christian told the Los Angeles Times that she’s reluctant to spend, thanks to the downturn caused by COVID-19, adding, “We never know when something like this will hit again.”

While she used to visit her local Family Dollar discount store and make a number of small “impulse” purchases, like knicknacks, those days are gone. “Now I’ll only buy things I absolutely need,” Christian said.

ThinkWhy continuously monitors and forecasts industries and MSAs to measure the impact on the labor market. Stay current with us. We are here to support organizations and provide insights during the economic downturn as well as the recovery phase.