Delta impact on consumer behaviour appears limited

Karsten Junius August 31, 2021 09:55

The rise in COVID-19 cases in the US, the drop in indicators such as restaurant bookings or passengers passing through airports, plus the plunge of the August Michigan consumer confidence index have raised concerns about the US economic outlook. While we shouldn’t completely dismiss these signals, we are not overly concerned, for three reasons:

First of all, real-time economic data need to be treated with caution. For one, these indicators are not seasonally adjusted. True, daily travellers at US airports have fallen. But this probably reflects, to a large extent, the end of the holiday season rather than any significant impact from COVID cases on travel intentions. Though, the drop in passengers in recent weeks has roughly followed the same path as in 2019 prior to the pandemic.

According to OpenTable, visits to restaurants have dropped a bit in July and August, compared to the same months in 2019, possibly reflecting the rise in COVID cases. Yet, those numbers are only marginally lower than the June numbers when there were very few daily new cases. We have looked at restaurant bookings by state and the associated evolution of cases since the ‘Delta wave’ started. We found a small negative correlation between the increase in weekly cases and changes in weekly restaurant bookings, the results are far from conclusive, with an R-square of less than 1%. In addition, restaurant booking numbers do not reflect how much consumers are spending on food and beverages. In fact, while visits to restaurants were about 5% lower in July 2021 compared with 2019, spending in bars and restaurants was about 10% higher, according to latest retail sales reports.

Secondly, household balance sheets are in a good shape and the labour market is set to strengthen further in the coming 18 months, while headline inflation is expected to come down from its peak (though how fast inflation will fall remains very uncertain), boosting labour real income. A back-of-the-envelope calculation suggests that if the labour market gets back to maximum employment by the end of next year, employment could grow by an additional 5% in 2022. And, if wages pick up by 4%, with an assumption of 2.5% inflation rate, the nominal labour income and the real income will be boosted by 9% and 6.5%, respectively, . Historically, the pace of consumption and strength of consumer confidence tend to track real income growth. This is a long-winded way of saying we expect the big drop in the University of Michigan consumer confidence index earlier this month to reverse in the coming months. In fact, the Bloomberg consumer comfort index has been rising over the past several weeks.

It is unavoidable, however, that the contribution of consumer spending to GDP growth will drop significantly in the second half of the year. Spending grew at an annualised rate of about 11% in both the first and second quarters, fuelled largely by huge fiscal transfers. Spending on goods is 16% higher now than it was before the pandemic (though the level of spending on services has still not fully recovered). With no cheques from the government coming through the post, consumer spending is likely to grow at a slower but still sustainable pace at 3% to 4% in the third and fourth quarters.

Finally, supply-side bottlenecks combined with very strong demand have compelled companies to deplete their inventory stocks. Restocking of inventories should contribute significantly to growth in the second half of the year. According to the latest ISM survey, producers’ assessment of the level of inventories of their customers has never been so low since the start of the survey series in 1997. Although the supply-side constraints could frustrate corporates’ ability to reconstitute their stocks, the Atlanta Fed estimates that restocking will add 3.6 percentage points to GDP growth in the third quarter.

In short, a moderation in the pace of consumer spending in the second half of the year could always be on the cards after a very strong surge in the first half of the year. We don’t think the resurgence of COVID cases has too much of an impact on consumer behaviour. Looking to the end of the year, a strong restocking of depleted inventories should become the main driver of GDP growth.

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Karsten Junius

Chief Economist, Head Economic Research at Bank J Safra Sarasin