Consumers are shifting spending from goods to services

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At Mint Indian Bistro in suburban Las Vegas, owner Kris Parikh’s regulars are back. His second downtown restaurant once again welcomed a tour bus full of Indian tourists craving familiar tastes. His restaurant on the Las Vegas Strip, Divine Dosa & Biryani, is benefiting from the return of gamblers to the city’s casinos.

Parikh, 47, still has plenty of headaches, including a shortage of workers and rapidly rising prices for staples like lamb.but the worst coronavirus The pandemic, his restaurants are bouncing back as pandemic-weary consumers switch from buying goods to consuming services, such as dining out.

“The tourists are back. We’re seeing an increase in traffic. It’s been a busy weekend,” Parikh said. “In April 2020, we had absolutely no business. Are we beating around the bush? Absolutely.”

For more than two years, while Americans have weathered the pandemic by spending heavily on television, furniture and home improvement, businesses that rely on in-person commerce have suffered. The cinema was pitch black. The plane was empty. The restaurant is starving.

Consumers are now returning to pre-pandemic habits, with the balance between spending on goods and services returning to May 2020 levels, according to inflation-adjusted data from freight forwarder Flexport. Another indicator cited by Goldman Sachs showed commodity consumption was about 5% above its pre-pandemic trend, down from a 15% peak gap.

“We’re just seeing the early stages of consumer spending shifting from goods to services. You’ll see more over time. Foodservice is pretty strong. Travel, airfare and hotel occupancy are picking up,” said chief executive at Oxford Economics U.S. financial economist Kathy Bostanjcic said. “Consumers are paying more attention to spending on services, especially as spring and summer approach.”

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The shift to services reflects consumers’ desire to resume their pre-pandemic lifestyle, which is good news, not just for business owners like Parikh.It could also ease pressure on stressed supply chains and help the Fed cool inflation.

This change is evident across the economy. retail sales April was up 8.7% from a year ago, according to the Census Bureau’s advance estimate, which did not account for inflation. But spending at restaurants and bars rose nearly 20 percent.

Inflation-adjusted spending on services hit a record $8.6 trillion in March, surpassing the previous record set in February 2020, according to the U.S. Commerce Department.

Hotelier Marriott said global leisure traveler room demand was 10% higher than 2019 bookings in the first quarter. Southwest Airlines said its operating income for the quarter ending in June will exceed pre-pandemic levels. But Target, one of the largest U.S. retailers, has been caught off-guard in recent weeks as a sudden shift in consumer preferences has left it with a slew of products like appliances and televisions that have been forced to discount.

“Are we back to normal? No, will we be back to normal? Yes,” said Chris Rogers, chief supply chain economist at Flexport in London.

Since the beginning of the pandemic, Americans stuck at home have found comfort in shopping. stuff for home use. Improve things at home. Things to wear at home.

This boom in goods — and a bust in services — reversed the usual patterns of consumer behavior during recessions. Tough times often prompt people to delay buying big-ticket items. But instead, as millions of Americans work from home, dry cleaners and hotels suffer while e-commerce orders soar.

Multiple rounds of federal stimulus spending — along with the Fed’s loose monetary policy — have helped support consumption as the economy recovers. Over the past year, as unemployment has steadily declined, ample jobs have fueled continued spending on goods.

A lot of what Americans buy comes from overseas factories, especially in China, and it’s clogged Global Supply Chain.

By last spring, a conflict between surging demand and tight supply had pushed up prices. At the Fed, Chairman Jerome “Jay” Powell said supply disruptions will prove temporary and prices will moderate for most of 2021.

Target executives had expected some of the bubbles in consumer demand to taper off this year as stimulus money dwindled. But the speed and extent of the shift caught them off guard.

The retailer ended up getting a plethora of certain items — especially big-ticket items like TVs and appliances — and not others. Popular items such as fashionable clothing for people to resume their social lives and sunscreen and makeup for travelers are suddenly in demand, executives told analysts this month.

The company opted to lower prices on its remaining merchandise, easing the overstock at the expense of quarterly profits.

“While we expect a post-stimulus economic slowdown … we expect consumers to continue to shift spending away from goods to services,” Chief Executive Brian Cornell said. “We didn’t anticipate the magnitude of this shift.”

New consumer sentiment may start to affect supply chain. Trucking demand has reportedly fallen by about a third since early March, but remains high. truckstop.commarket demand index.

The drop in demand is hitting new entrants to the short-haul freight business, said Jason Hilsenbeck, president of Load Match, an equipment clearinghouse in Naperville, Illinois. Since the beginning of 2021, more than 2,500 new one- or two-person businesses have entered the market, looking to capitalize on rising demand for freight, he said.

“Small trucking company that made a fortune last year [the] High-paying spot market bears the brunt [to] There is load when cargo volumes drop,” he said via email.

The number of imported containers arriving at the Port of Los Angeles has been below last year’s figures for seven consecutive weeks. The backlog of container ships at sea stood at 25 on Friday, down from a record high of 109 in January, according to data from the Southern California Marine Exchange, a nonprofit that tracks ships entering the nation’s largest import gateway.

The port’s executive director, Gene Seroka, said it’s unclear whether the changes reflect shifting consumer tastes, given the time lag between when U.S. companies place import orders and when shipments arrive in Southern California. The shipments arriving in Los Angeles this week were ordered three to four months ago, he said.

But Seroka does expect imports to slow this year. At some point, accelerated purchases can deplete latent demand. Consumers who bought a new refrigerator or remodeled their home last year won’t do it again this year.

“You’ll see imports level off, maybe moderate, and then move more into services,” he said.

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The shift could help ease disruptions to the inflation supply chain, which the Fed’s Powell called “larger and more protracted than expected.” (Other factors that could limit supply and push up prices are beyond the Fed’s control, including the fallout of the war in Ukraine and China’s use of draconian lockdowns to stem the spread of the coronavirus.)

Durable goods prices rose 14% over the past year, while service costs rose 5.4%, According to the Bureau of Labor Statistics.

A shift to higher spending on services could also reshape demand for labor. The goods production and transportation sectors have underperformed services during the pandemic. The surge in e-commerce added nearly 675,000 warehouse workers. Factory employment has just recovered to February 2020 levels, while employment in industries that interact directly with consumers, such as hotels and restaurants, remains subdued.

According to the U.S. Bureau of Labor Statistics, nearly 1.5 million leisure and hospitality jobs that existed in February 2020 have disappeared.

The Fed is expected to continue raising rates by half a percentage point at its next two meetings to slow consumer price gains. With nearly two vacancies for every job seeker, there is room to cool corporate hiring without eliminating existing positions.

“The demand for workers will be rebalanced. But I’m not necessarily looking for mass layoffs,” Bostanisic said.

In fact, the shift in consumer preferences is gradual. Even if consumers change their buying plans today, Target is ordering earlier than usual to ensure it has the right inventory to meet demand in a few months. This preventive ordering — designed to stay ahead of crowded supply chains — helps keep supply chains congested.

Meanwhile, in Las Vegas, Parrick was waiting for the convention crowd to return. While monthly visitor traffic is about 10 percent below 2019 levels, attendance at industry conferences is still more than 40 percent lower than it was three years ago, according to the Las Vegas Convention and Visitors Authority.

“We want meeting traffic to recover,” said Parikh, who expects to break even this year before returning to profitability in 2023.