Consumer Spending and the COVID-19 Pandemic

Introduction

At the start of 2020, the COVID-19 epidemic reached global proportions and became a pandemic. Between January and March, the word "pandemic" appeared in 82 percent of the reports on country economic conditions published by the Economist Intelligence Unit.¹ This article describes the impact of the pandemic on U.S. consumer behavior in the initial months of the pandemic. Measuring the full impact of the COVID-19 pandemic on the U.S. economy is still a work in progress.²

Changes in Retail Sales

Between May 2018 and February 2020, retail sales at bars and restaurants were almost equal to retail sales at food and beverage stores, as shown in Figure 1. The figures shown are adjusted for changes in the cost of living over time. This is done by dividing the sales figures by the consumer price index (CPI) and multiplying by 100.³ The CPI measures the average change over time in the prices of a typical basket of goods and services for an urban consumer. The CPI measures price changes from the perspective of buyers.

When mandated social distancing started to help slow the spread of the virus, spending habits changed. As Figure 1 shows, households changed where they bought food and beverages. Starting in March, consumer demand switched—almost dollar for dollar—from restaurants and bars to food and beverage stores. Many consumers chose "staying in" as a substitute for "eating out." By April, after the economy entered a recession, retail sales decreased both at bars and restaurants and at grocery stores. Because incomes decrease and unemployment rises during recessions, consumers cut back on their spending.

Retail sales at other types of stores dropped as well, reflecting similar consumer choices. Between February and April, sales of clothing and clothing accessories decreased by 86 percent and sales of motor vehicles and parts decreased by 35 percent.⁴ Clothing is considered a nondurable good because consumers do not tend to keep their clothes for many years. In contrast, motor vehicles are considered durable goods because consumers do tend to keep them for many years. Yet the largest decline in consumer spending was for services, not durable or nondurable goods.

Services are actions that satisfy people's wants. When we purchase a service, we pay for someone else's labor. Haircuts, college tuition, and hotel stays are services that satisfy our wants for fashion, education, and hospitality, respectively. In 2019, purchases of services amounted to 64 percent of all the spending by consumers. Between February and April 2020, spending on services decreased by 20 percent. Although that spending picked up after April, by July it was still below its pre-recession level.⁵

Reduced Demand for Travel and Hotel Services

With the suspension of professional sports and the closure of cultural and recreational venues during the onset of the pandemic, many consumers scrapped personal travel plans. Teleconferencing substituted for business travel to accommodate social distancing. Figure 2 shows that between February and May, rail and air travel declined 96 percent and 91 percent, respectively. During that same time, road travel declined 27 percent. The rebound in road travel since April might reflect the substitution of travel by train or plane with travel by car—to permit social distancing.

Hotel stays are common complements to medium- and long-distance travel.⁶ Thus, the reduction in travel decreased demand for hospitality services. Fewer customers and less income forced businesses to reduce their number of employees.⁷ Comparison of the number of people employed in the leisure and hospitality industry in May 2019 and May 2020 shows how drastically the pandemic decreased employment in that industry. The declines ranged from 18 percent in Oklahoma to 62 percent in New York.⁸

Finally, the reduction in the demand for hotels resulted in double-digit drops in the producer price index (PPI) for hotels and motels. The PPI measures the change over time in the prices received by producers of goods and services; that is, it shows the change in prices from the perspective of sellers. Figure 3 shows that the prices received by hotels and motels (excluding casino hotels) between April and October 2020 decreased no less than 14 percent from the prices in the same months the previous year.⁹ Similarly, fewer customers at restaurants resulted in a large drop in the global price of fish, as the hospitality industry is a large consumer of them.¹⁰

Conclusion

The onset of the COVID-19 pandemic changed consumer spending habits. People substituted meals purchased at restaurants with meals cooked at home. As the economy entered a recession, the demand for both types of goods and services decreased. Also, people traveled less and the demand for hotel services decreased. As a result, both employment and prices declined in the leisure and hospitality industry.