Onerecently asked Brian Olsavsky, Amazon’s treasurer, has been unabashed about Amazon’s vast network of warehouses. “We have so much space right now.” Facing a surge in demand during the pandemic, the online retailer doubled its production capacity from 193 million square feet (18 million square meters) at the end of 2019 to two years later of 387 million square feet. Today, it is oversupplied, and the company says it costs tens of millions of dollars a day.
Retailers are bracing for a slowdown or even a recession as the Federal Reserve raises interest rates. But Amazon’s troubles reflect another key factor in the U.S. economy: a shift in spending from goods to services, which can lower inflation and make the Fed’s job easier.
Another retailer, Target, reported a 52% drop in net income in the three months to April compared with a year earlier, in part due to rapidly slowing demand for appliances, furniture and televisions. “us [expected] Consumers continue to shift their spending from goods to services,” the company’s owner Brian Cornell said, but “we didn’t anticipate the magnitude of that shift. Overall, the shift should ease pressure on global supply chains and reduce inflation. But progress has been slow and uneven.
Confined to their homes during the height of the pandemic, Americans splurged on appliances, cars and furniture. Fiscal generosity, including three rounds of “stimulus” checks, fueled the buying spree. People buy alternatives to services they can no longer use — exercise bikes, for example, to make up for closed gyms. Maybe with a little extra cash, they also see themselves as watches and luxury items. A year after the pandemic, the makeup of consumer spending has changed dramatically. By spring 2021, goods accounted for 42% of household spending, up from 36% before the pandemic; services accounted for 58%, down from 64%, down more than $900 billion annually.
Several other Western countries have seen similar increases in consumption of goods, but few have seen a larger increase than the United States.Goldman Sachs’ Daan Struyven and Dan Milo compare the evolution of physical commodity spending across 23 countries OECD And found that only Chile and Norway outperformed the United States. In Japan, merchandise purchases in the final three months of 2021 were 7% below pre-pandemic trends.
The consumer boom in the U.S. helped pull the economy out of recession, but it also contributed to inflation problems. The flood of new orders has overwhelmed global supply chains that have already suffered from pandemic-related disruptions, causing port congestion and shipping delays. Commodity prices have risen due to short supply. The U.S. Bureau of Labor Statistics estimates that commodity prices pushed up consumer price inflation by 4.9 percentage points in the year to April 2022, compared with a 0.1 percentage point reduction in the 12 months before the pandemic.
Now spending is starting to turn in the other direction. Spending on goods fell in the year to April and is now 9% above the pre-pandemic trend and down from last year’s high of 16%, data released on May 27 by the Bureau of Economic Analysis showed. Services spending rose 7% over the same period, just 3% below the pre-pandemic trend. But some services recover faster than others. Goldman’s Struyven and Milo noted that while “interesting” consumer categories with pent-up demand such as food services, air travel and hotels have rebounded over the past year, others have lagged. Services catering to white-collar professionals have also been slow to recover. In the absence of the pandemic, public transit spending is down about 50% from where it would have been; laundry and dry cleaning revenue is 20% below trend.
Even some essential services have been slow to rebound. Spending on doctor and dental services was about 15% lower than the pre-pandemic trend; childcare was down 22%. Meanwhile, demand for many discretionary items shows little sign of abating. Spending on jewelry and recreational vehicles were 53% and 43% higher than trend, respectively. Spending on pets rose 23%.
One question is whether the composition of consumer spending will return to its pre-pandemic normal. Hopefully this will ease supply chain bottlenecks and help reduce inflation. However, some uncertainties lie ahead. This process may seem slow. While Target has been faltered by the power shift to services, if recent trends continue, spending on goods and services may not return to pre-pandemic levels until the third quarter of next year. Some habits are likely to stick: The rise of remote work, for example, may have permanently changed consumption patterns, keeping relative demand for goods at higher levels than they were before the pandemic.
Hovering over it all, however, is a potentially deteriorating economic environment. Consumer price inflation is outpacing wage growth, and households are increasingly pessimistic about their personal finances. Over the past few years, U.S. consumers have fueled an extraordinary commodity boom. What they will do next is less certain. ■