Our Economic Recovery Depends on Consumers

Enough already. The economy is bad. This is the sharpest, deepest recession in 80 years. We get that. Let’s talk about something else. Like, how does the economy recover?

Unfortunately, to answer that question we need to know what kind of recession we’ve got. So let’s look at some measurements that tell us what’s been happening.

Gross domestic product measures the value of goods and services produced in our economy. The growth of GDP is our most complete measure of how well the economy is doing. Most of the time we show the quarterly numbers at annual rates, basically multiplying by four, and we look at “real” GDP, which removes the effect of inflation. Real GDP in the first quarter fell 4.8 percent. Bad, but not catastrophic.

But the recession started in March. January and February were fine, probably a lot like 2019. In 2019, real GDP grew 2.1 percent. If that growth continued in January and February, but the whole quarter showed a 4.8 percent decline, then real GDP must have fallen 19 percent in March. That is catastrophic.

Twelve years ago the Great Recession was kicked off by declining investment spending. That’s spending on business buildings, equipment, software and inventories, and home construction, too. Investment spending began to fall in 2007, a year before the economy as a whole, and dropped 21 percent in 2009.  Spending by households on consumer goods and services fell just 1.3 percent that year.

That is not what’s happening this time. In the first quarter, investment spending fell 5.8 percent, a little less than its 6.2 percent drop in the fourth quarter. Consumer spending, though, fell 7.9 percent in the first quarter, after rising 1.8 percent in the fourth quarter. Spending in March must have dropped more than 20 percent. Consumers are leading this recession.

A new report showed that total retail sales were down 22 percent this April compared to April a year ago. Sales at restaurants were off 49 percent, but most restaurants were closed except for takeout and delivery. Consumer spending was down partly because there were fewer places to shop. But auto dealers, auto parts stores and gas stations were essential businesses. Most remained open. Their sales dropped by a third or more. Consumers weren’t spending, even when they could.

That’s also shown in the inflation data. If most goods and services were in short supply, prices would go up. Consumers would compete to buy scarce goods, and retailers would not need to cut prices. We’d get higher inflation. But according to the consumer price index, prices are falling. That’s not inflation, that’s deflation. Even after removing the influence of falling gasoline prices, the CPI fell 5.2 percent in April. Businesses were cutting prices, trying to get consumers to buy.

The drop in consumer spending is leading the recession. To recover, consumers must spend again. What will it take?

Consumers need income to spend. Tens of millions of people have lost their jobs. As the economy opens up, people can go back to work. But some employers have not survived. Those that open at 50 percent capacity may not need as many employees. Then there’s the vicious cycle: Businesses won’t employ all their workers if sales are down; sales can’t increase until people are employed and earning income.

Employed people earning income can go back to spending. But what if they’ve depleted their savings or gone into debt during the lockdown? Their initial earnings may go to paying debt or rebuilding nest eggs. The individual payments and added unemployment benefits from the CARES act were meant to support people’s finances. Let’s hope it worked.

People can’t shop if stores are closed. As stay-at-home orders are lifted and stores reopen, shopping and spending can resume. Unless it doesn’t. A Reuters survey at the end of April found that a majority of people won’t go back to movies, concerts or sporting events until there’s a vaccine. The ultimate reason that consumers quit spending was because they were afraid of getting sick.

Our economic recovery comes back to the virus. Get it under control, and consumers will feel confident enough to spend. Without that, full recovery probably won’t happen.