The Consumer in Crisis? Differences Between Downturns

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The Consumer in Crisis? Differences Between Downturns

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Alexander Villacampa and Jun Jiang
OCT 28, 2020

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The consumer is the cornerstone of the macro-economy with personal consumption expenditures making up approximately 70% of GDP. A view into the health of the consumer should help our understanding of how economic activity could develop over the coming quarters. Analyzing the state of the household is perhaps most valuable during a recession, when economic uncertainty is highest. Although downturns have similar aggregate consumer characteristics, their causes and the impact on different groups can vary widely. How these various groups are affected ultimately plays a large role in a recession’s progression and what actions authorities may need to take in order to mitigate both the depth and length of a downturn. By parsing through detailed macro- and microeconomic data, we may be better able to infer the impact these differing effects may have on consumer groups following the COVID-19 pandemic.

Key Takeaways

  • The Great Financial Crisis (GFC) and the coronavirus pandemic created two unique crises that impacted consumers in dissimilar ways. While the bursting of the housing bubble hit asset holders and workers who were closest to the residential real estate market, the coronavirus economically struck those at the lowest end of the income spectrum.
  • The services industry, specifically leisure and hospitality, remains the most battered of all sectors. A substantial decline in services spending, moving money away from a traditionally low-wage and tight-savings labor demographic, is a major factor of the current economic fallout.
  • Low-wage earners are likely to experience little immediate or direct benefit from extraordinary monetary policy measures. This income group had the least exposure to housing during the GFC and currently has the lowest incidence, either directly or indirectly, of stock ownership. A boost for this demographic will mainly come from an improvement in the jobs market, not rising asset prices.
  • Although the job openings rate has improved noticeably for the leisure and hospitality sector, there is still a substantial number of individuals collecting unemployment benefits. This is evident in the still-outsized level of accommodation and food services’ share of continuing unemployment claims.
  • A strong fiscal and monetary policy response from Capitol Hill has temporarily backstopped low-income consumers, buying time for the labor market to improve. The absence of further fiscal stimulus may deteriorate their financial standing.