Consumers are shifting their spending from goods to services
Parikh, 47, still has a lot of headaches, including a labor shortage and rapidly rising prices for staples like lamb. But after weathering the worst of the coronavirus pandemic, its restaurants are rebounding, as pandemic-weary consumers shift from buying goods to spending on services, like dining out.
“Tourists are coming back. We are seeing an increase in traffic. Weekends are busy,” Parikh said. “In April 2020, we had absolutely nothing to do. Are we turning the corner? Absolutely.”
For more than two years, as Americans weathered the pandemic by gorging on TVs, furniture and home improvements, businesses that relied on face-to-face commerce suffered. Movie theaters are shut down. The planes were flying empty. The restaurants are starving.
Consumers are now back to their pre-pandemic habits, with the balance between spending on goods and services returning to its May 2020 level, according to inflation-adjusted data from freight forwarder Flexport. A separate metric cited by Goldman Sachs shows that consumption of goods is about 5% above pre-pandemic trend, down from a maximum deviation of 15%.
“We are only in the early stages of rotating consumer spending from goods to services. Over time, you will see more. Restaurant services are quite solid. Travel is increasing, air fares and hotel occupancy,” said Kathy Bostanjcic, chief financial economist at Oxford Economics in the United States. “The consumer is shifting more toward service spending, especially with spring and summer upon us.”
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The shift to services, reflecting consumers’ thirst to resume their pre-pandemic lifestyles, is good news and not just for business owners like Parikh. It could also ease pressure on stressed supply chains and help the Federal Reserve in its campaign to calm inflation.
The change is evident throughout the economy. Retail sales in April rose 8.7% from a year earlier, according to the Census Bureau’s preliminary estimate, which does not take inflation into account. But spending at restaurants and bars jumped nearly 20%.
In March, inflation-adjusted spending on services hit a record $8.6 trillion, surpassing the previous record set in February 2020, according to the Commerce Department.
Hotelier Marriott said global demand for rooms from leisure travelers in the first quarter was 10% higher than 2019 bookings. And Southwest Airlines said its quarterly operating revenue by the end of June will exceed levels. before the pandemic. But Target, one of the nation’s biggest retailers, has been caught off guard in recent weeks as consumer preferences have shifted sharply, leaving it with a mountain of products like appliances and televisions that it has been forced to reduce.
“Are we back to normal? No. Are we going back to normal? Yes,” said Chris Rogers, senior supply chain economist for Flexport in London.
From the start of the pandemic, Americans trapped at home took comfort in buying things. Things to use at home. Things to improve the house. Things to wear at home.
This boom in goods – and the collapse in services – has reversed the usual pattern of consumer behavior during a recession. Difficult times usually cause people to put off buying big-ticket items. But instead, with millions of Americans working from home, dry cleaners and hotels suffered as e-commerce orders soared.
Several rounds of federal stimulus spending — and the Federal Reserve’s easy money policies — have helped support consumption as the economy recovers. Over the past year, as the unemployment rate has steadily declined, ample job opportunities have fueled continued spending on assets.
Much of what Americans bought came from factories overseas, particularly in China, and clogged global supply chains.
Last spring, the collision between growing demand and tight supply pushed prices up. At the Federal Reserve, Chairman Jerome “Jay” Powell has said for most of 2021 that supply rumbles will prove temporary and prices will decline.
Target executives expected some of the scum from consumer demand to decline this year as stimulus dollars dwindle. But the speed and scale of the change caught them off guard.
The retailer ended up with too many of some products — especially large items like TVs and appliances — and not enough of others. Items like trendy fashion for people resuming their social lives, as well as sunscreen and cosmetics for travelers, have suddenly been in vogue, executives told analysts this month.
The company opted to cut prices on excess goods, which reduced its inventory backlog at the expense of quarterly profits.
“While we anticipate a post-stimulus slowdown…and expect the consumer to continue to refocus spending on goods and services,” CEO Brian Cornell said. “We did not anticipate the magnitude of this change.”
The new consumer mood may be starting to affect supply chains. Trucking demand has fallen by about a third since the start of March, although it remains high, according to Truckstop.comthe market demand index.
Jason Hilsenbeck, president of Load Match, an equipment clearinghouse in Naperville, Ill., said the drop in demand is hitting new entrants into the short-haul trucking business. More than 2,500 new one- and two-person operations have entered the market since the start of 2021, hoping to capitalize on high cargo demand, he said.
“The small trucking companies that killed last year on [the] the very profitable cash market is the first not to [to] have loads when cargo volumes go down,” he said by email.
The number of imported shipping containers reaching the Port of Los Angeles has been below last year’s figure for seven consecutive weeks. On Friday, the backlog of container ships loitering offshore was 25, down from a record 109 in January, according to the nonprofit Marine Exchange of Southern California, which tracks vessels entering the main import gateway from the country.
Given the lag between when U.S. companies place import orders and when goods arrive in Southern California, it’s unclear whether these changes reflect changing consumer tastes, says Gene Seroka. , executive director of the port. The goods arriving in Los Angeles this week were ordered three to four months ago, he said.
But Seroka predicts lower import volumes this year. At some point, accelerated purchases of goods exhaust potential demand. Consumers who bought a new refrigerator or remodeled their home last year will no longer do so this year.
“You’ll see a bit of a leveling, maybe a slowdown, in imports and then more in the services sector,” he said.
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This kind of change could help mitigate inflationary supply chain disruptions that the Fed’s Powell said have been “bigger and longer lasting than expected.” (Other factors that could restrict supply and drive up prices are beyond the Fed’s control, including the fallout from the war in Ukraine and China’s use of harsh containment measures to stop the spread of covid. .)
Over the past year, the prices of durable goods have increased by 14% while the cost of services has increased by 5.4%, according to the Bureau of Labor Statistics.
A move towards higher spending on services could also reshape labor demand. During the pandemic, the sectors producing and transporting goods have eclipsed services. The rise of e-commerce has added nearly 675,000 warehouse workers. Factory employment has roughly recovered to its February 2020 level, while employment in industries with direct interaction with consumers – such as hotels and restaurants – remains depressed.
Nearly 1.5 million recreation and hospitality jobs that existed in February 2020 have disappeared, according to the BLS.
The Fed is expected to continue raising interest rates by half a percentage point at each of its next two meetings in an effort to slow consumer price inflation. With nearly two job openings for every job seeker, there is an opportunity to cool corporate hiring without cutting existing positions.
“There will be a rebalancing of the demand for workers. But I’m not necessarily looking for big layoffs,” Bostanjcic said.
Indeed, the evolution of consumer preferences has been gradual. Even though consumers are changing their shopping plans today, Target is ordering earlier than usual to ensure it has the right products in stock to meet demand several months from now. These precautionary orders — designed to stay ahead of congested supply chains — help keep them congested.
In Las Vegas, meanwhile, Parikh awaits the return of the convention crowds. While monthly tourist traffic is about 10% below 2019 levels, industry convention attendance remains more than 40% lower than three years ago, according to the Las Vegas Convention and Visitors. Authority.
“We want that convention traffic back,” said Parikh, who expects to break even this year before returning to profitability in 2023.