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Obvious pandemic-era epiphanies include “I hate my job”, “school is childcare” or “virtual choir rehearsals are atrocious”. Americans seem to have leapt on a less obvious one: “materialism is fantastic”. Comparing the fourth quarters of 2019 and 2023, consumers devoted around two percentage points more of their spending to physical stuff. What’s going on? Have they changed for good(s)?
When lockdowns shuttered restaurants and hobbled travel, the switch in spending towards things made sense. (My own contribution was a cancelled gym membership, a treadmill and two kittens.) Germany, France and the UK all saw similar trends.
What happened next was weirder. Even after the relaxation of Covid-era restrictions, Americans’ share of spending on goods stayed high. This was particularly strange given that in the past they had tended to switch towards services as they got richer. A bit like someone celebrating their lottery win by buying a toastie-maker rather than going out on the town.
Economists have spent the past couple of years hunting for possible explanations. An obvious one is that behaviour hasn’t changed, but prices have, forcing people to fork out a higher share of their budget on goods. My treadmill was no bargain, and more generally the pandemic and the later energy-price shock disrupted the long-run trend of goods becoming cheaper relative to services.
The rising relative price of stuff does seem to have contributed to German spending patterns, which have also tilted towards goods. Adjusting for inflation, OECD data suggest people have actually shifted their consumption slightly towards services. They may be spending more on goods, but getting less bang for their buck.
By contrast, US relative price changes don’t explain much. The growth in spending on durable goods is both real and stunning. In the fourth quarter of 2023, consumers hoovered up almost 30 per cent more durable goods than they did in 2019, even after adjusting for price changes. They are spending more bucks, and are getting more bang.
Some have suggested that the material boom reflects a pandemic-related shift in work patterns. Perhaps as home offices have become more popular (midweek golf, anyone?) spending has shifted towards kit. In October 2023, Goldman Sachs compared metro areas and found that more working from home was indeed associated with higher spending on goods.
The puzzle is that this shift hasn’t shown up more obviously in other countries. Britons also moved towards remote work during the pandemic. (As Nick Bloom of Stanford University explained to me, the English-speaking world tends to afford its workers more autonomy.) And yet their goods spending as a share of the total has slumped to pre-pandemic levels.
Another possibility is that some consumers are still scared of venturing out into Covid-ridden crowds. But both Britons and Americans devoted a bigger share of their spending to restaurants and hotels in 2022 than in 2019. Any theory has to explain why Americans would be splurging more enthusiastically (relative to Brits) on cars, “recreational items and equipment, gardens and pets”, as well as “audiovisual, photographic and information processing equipment”.
The transatlantic divergence could have something to do with the fact that Europe was hit by a relatively nasty energy crisis. An analysis by the European Central Bank suggested that energy supply shocks curbed spending on durable goods in particular. Though as Samuel Tombs of Pantheon Macroeconomics notes, much of the goods spending normalisation in France and Britain happened by the second half of 2021, before energy prices surged.
It is easier to deconstruct existing theories than it is to come up with new ones. And as with all data hunting, there is always the possibility that quirks will be revised away.
To the extent that this is US-specific, the fallback explanation is that it is the product of the stunning recovery. Perhaps a combination of healthy balance sheets and income growth skewed towards those on low wages have powered the trend. And maybe Brits would have spent more on home offices or gaming equipment had there been more cash swilling around.
In favour of the “it’s the cycle, silly” explanation, the most recent data suggests that the share of American spending on goods is falling. Between December 2023 and January 2024 it dropped by 0.5 percentage points. On that trajectory, it would take around six months to reach its pre-pandemic path. Betting against the American consumer tends to be unwise. But those supplying it with stuff shouldn’t get too comfortable.
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