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Bringing Back Services

Macro Minute
August 17, 2021

Household spending fell sharply, especially on services, during the early days of the pandemic because of social distancing and business restrictions. On a nominal basis, spending on services only returned to pre-pandemic levels in June of this year, and adjusted for inflation, spending on services remains 3.1 percent below February 2020 levels. In contrast, durable goods consumption fell in March and April 2020 but by May of that year was essentially at pre-COVID-19 levels (both in real and nominal terms). As of June, inflation-adjusted durable goods spending is 22.7 percent above February 2020 levels.

"... Pent-up demand by high-income households could play a significant role in lifting post-pandemic consumption."

That story is expected to change significantly as the recovery continues, with services poised for a big comeback. We saw evidence of that in last month's personal spending data. Consumer spending continued to rotate away from goods toward services. Services spending rose 1.2 percent monthly in contrast to a 0.5 percent increase in goods spending, which included a 1.5 percent decline in durable goods spending. Adjusted for inflation, real services spending increased 0.8 percent monthly, accelerating from 0.7 percent last month, and real goods spending fell 0.2 percent monthly, driven by a 2.5 percent decline in durable goods spending. The figure below shows the monthly change in nominal spending across various categories of goods and services in June, with services making up six of the eight fastest growing categories.

Faster growth in services is a sign that after months of being forced to cut back on travel, restaurants, and hotels, consumers are ready to get back to normal. And the kinds of consumers opening their wallets will likely be different this year compared to last year. In particular, high-income households are likely to drive much of the recovery in services spending. A New York Fed study found that high-income households cut their spending on goods and services affected by social distancing more than lower-income households during the pandemic. 2020 mid-year results from the Bureau of Labor Statistics' Consumer Expenditure Survey confirms this, with services expenditure falling 3.9 percent for households in the top income quintile versus an increase in services expenditure for the bottom two income quintiles.

The New York Fed study suggests pent-up demand by high-income households could play a significant role in lifting post-pandemic consumption. Look at the monthly services spending data as a barometer for how big a boost pent-up demand might give the economy. But on the other side of the coin, if negative economic impacts from the delta variant emerge, with high-income consumers seemingly more sensitive to pandemic concerns, spending on services might also be one of the first things to fall.

Views expressed in this article are those of the author and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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