By Thomas Kilbane, Senior Economist
As we head into the holiday season and, subsequently, into 2021, it is important to separate the current recession from the public health crisis to understand the implications of each on business going forward. While every recession is different, there are some clear indicators signaling the economy’s current state, including changes in consumer spending, significant job losses, and reduced industrial production. Given that these are all fairly typical of prior recessions, what makes this recession different?
In the current recession, the pandemic is impacting the economy in unprecedented ways. First and foremost, the pandemic continues to drive massive lifestyle changes. This dramatic and widespread lifestyle change across the board is not a normal aspect of an economic recession, and it is affecting businesses differently. For example, as people spend more time at home, they are also spending more on home improvement and DIY style projects. Similarly, while people are not going out to the movies anymore, spending on home entertainment, especially streaming services, has skyrocketed. As a result, certain types of businesses are flourishing, while others are failing. We are not just seeing the typical pullback of consumer spending we would expect during a recession, but also a shift in where spending is happening.
The second unique implication of the health crisis during this recession is the government response. In particular, the direct stimulus to consumers in the form of government checks and the enhanced unemployment benefits. While the checks directly to individuals supported consumer health in April and May, the enhanced unemployment benefits sustained those who lost employment through the summer and into early autumn. This has resulted in the aggregate US consumer getting a raise this year and hides the fact that employment as a proportion of the population remains near the low point of the 2008-2009 recession. Consumer spending has been much higher than expected, given the weakness of the labor market. What does this mean going forward for businesses, and why is it important to separate the public health crisis from the recession?
While the health crisis launched us into a recession simultaneously, it is important to understand that it is unlikely that they both resolve at the same pace. Many of the initial federal stimulus programs are coming to an end, and we can already see the beginnings of a consumer spending pullback in some areas. If some of these unusual effects of the pandemic are starting to unwind, what does this mean for the economic recession, especially as we head into the holiday season? We should expect overall consumer spending to be down this year during the holidays, but there should still be some clear winners. Consumers remain conservative with their travel plans, which should leave a greater share of wallet leftover for gifts under the tree, even if the wallet is lighter than it was last year. And as we head into 2021, how the labor market evolves, the chances of a new round of fiscal stimulus, and how sticky our recent pandemic lifestyle changes will be moving forward will help us determine the differing paces the health crisis and the recession resolve.
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About Thomas Kilbane, Senior Economist
Thomas works with businesses across a wide variety of industries to improve understanding of their external environment and how it impacts their performance. Previously, Thomas was an analyst for the Ohio General Assembly, as well as at multiple firms in the financial services industry. Thomas holds a Masters’ of Applied Statistics and Applied Economics from The Ohio State University and a Bachelor’s degree from the Argyros School of Business and Economics at Chapman University.