SPY380.36-1.97 -0.52%
DIA309.45-4.53 -1.44%
IXIC13,192.35+72.96 0.56%

DJ -- Heard on the Street

· 02/05/2021 05:30
By Justin Lahart

Here's some advice for life after the pandemic: Make that restaurant reservation way in advance, prepare to pay up for that flight, get used to watching your team from the cheap seats and show up even earlier to the movie.

The slump caused by Covid-19 was unlike any other because consumer spending on services, which usually holds up well during downturns, cratered, and remains significantly below pre-pandemic levels. When the crisis eases -- something that will with hope begin happening later this year, as more people get vaccinated -- the recovery could be impressive.

Figuring out just how sharp that rebound will be is a matter of guesswork. While the limited experience the U.S. has with declines in spending on services suggests any rebound will be modest, Americans' hankering to make up for all things they have missed out during the pandemic -- and the ample savings many of them now have -- suggests otherwise. The country could be on the cusp of a rebound in demand for services that will be hard for it to meet.

Whatever the actual outcome is, it will set the course for the economy. Spending on services amounts to about half of U.S. gross domestic product, while more than four in five U.S. jobs are in the service sector.

Usually, recessions are driven by weakness in spending on goods -- items that run the gamut from socks to SUVs. That is because, even though Americans spend far more on services than on goods, big-ticket items in particular are easier to forgo when trouble starts. This downturn has been different not just because spending on services fell, but because, other than a brief period of weakness last spring, consumer spending on goods flourished as Americans bought items such as cars and washing machines in response to the pandemic. In the fourth quarter Commerce Department figures show that inflation-adjusted spending on goods was up 7.2% from a year earlier while spending on services fell 6.8% over the same period.

The early stages of economic recoveries are usually driven by spending on goods. That is because a lot of pent-up demand that built up during the recession gets released as people finally go and replace their old washing machine, for example.

Services spending hasn't picked up very much coming out of past recessions, in part because it usually hasn't weakened much. There also just isn't the same pent-up demand dynamic as for goods. Families might reinstate their Friday-night trip to the restaurant, for example, but they won't add another night out each week to make up for all the restaurant meals they lost.

But after a pandemic that has now kept people largely homebound for nearly a year, things could be very different. Making up for lost haircuts isn't going to happen, but eating out more, taking frequent trips to the movies and catching more ballgames all seem likely once people feel the coast is clear. Booking longer vacations and taking more flights to make up for lost time with distant family also seem feasible.

Moreover, thanks to the combination of reduced spending during the crisis and incomes that have been augmented by government relief checks, many people have an ample amount of money to spend. Federal Reserve figures show that as of the end of the third quarter households had $2.2 trillion more in cash and cash equivalents than at the end of 2019. With the saving rate elevated and another relief package now making its way through Congress, that figure is only likely to grow.

"There's a lot of extra money in people's pockets, and people are going to use it," said Deutsche Bank economist Peter Hooper.

Much of it is in the hands of those further up the income stream -- better-heeled Americans who have had an easier time keeping their jobs during the pandemic. These are also the people who spend the most on discretionary services. In 2019 Labor Department figures show that households in the top 10% by income spent more than twice as much on meals away from home as middle-income households and more than three times as much on entertainment. So if services spending does bounce back, it will be in areas such as those, as well as travel-related categories such as plane flights and hotel rooms, that could see the biggest jumps in demand.

That could be good news for some of the many service-sector workers who remain jobless. There are over two million fewer people working in restaurants than before the pandemic, and with luck a large portion of them will be employed again. Even so, "for some things, you will run up against supply constraints," says Morgan Stanley economist Ellen Zentner.

There are only so many rooms in a hotel, for example, and only so many people who can fit in a plane, so expect some prices to rise.

Ultimately, however, how soon and how fast services rebound will be dictated by how soon the pandemic dissipates and how soon people feel comfortable going out again. There are hopeful signs, including a recent step lower in Covid cases, but reasons to worry, too, such as the emergence of new coronavirus variations against which current vaccines may not be as effective.

The faster the country gains control of Covid, the better off the services sector and the economy, will look. Just get ready to spend some of that extra cash you socked away.

(END) Dow Jones Newswires

February 05, 2021 05:30 ET (10:30 GMT)

Copyright (c) 2021 Dow Jones & Company, Inc.