Calgary Herald

Why it's wrong to assume that consumer demand will revitalize economy

Increased spending on goods has left little room for growth,

- David Rosenberg writes. David Rosenberg is founder of independen­t research firm Rosenberg Research & Associates Inc. You can sign up for a free, one-month trial on Rosenberg's website.

You can't go anywhere these days and not hear about the pent-up demand “V-shaped” recovery that awaits us once we all (or enough of us) get vaccinated. This is premised on the assumption that we will all be going out to eat, fly and do everything that is fun and has been restricted, from movies to the theatre to the theme park to the casino and the nearest hotel.

But there are two issues here. First, these candidates for “pentup demand release” come to the grand total of 8.5 per cent of total consumer spending. That's all we're talking about. The really big spending items in the services area are rents, utilities and health care, which make up nearly 40 per cent of the aggregate spending pie, and outlays here are actually up fractional­ly over the past year.

Of course, there are other areas of service-sector spending that took it on the chin — from housekeepe­rs to day care to dental services — but they don't trade on the major stock market exchanges.

The second issue is that spending growth in the goods sector actually benefited from the pandemic, and the trend this past year doubled the historical norm. Because of the pandemic, spending on goods in the United States rose US$180 billion more than would have been the case had the crisis never happened. No doubt, the plunge in cyclical services came to a larger US$325 billion. But that gap is $145 billion, or less than one per cent of consumer spending.

That's what we are getting excited about? A one-per-cent lift?

When pundits talk about pentup demand, what other assumption­s are they making? Are they assuming that there will be no reversal or even levelling-off in the booming goods sector?

Look at what happened in the past year: furniture spending soared 16.4 per cent. In any given year, the norm is four per cent; major appliances spending rose 7.6 per cent, more than double the typical annual growth; home improvemen­t expenditur­e ran up 20.8 per cent in the year to November, four times the normal five per cent; spending on games and toys grew 34.4 per cent, compared to the normal four per cent.

Maybe we never before saw such a plunge in select service sector spending, but neither have we ever seen so many items on the goods front soar like this.

One would not have happened without the other.

The question for 2021, as we all go out and party, is just how many more cars, skillets, television sets, patio furniture and backyard decks are we going to need in the year ahead? There is no pent-up demand here, that is for sure. If anything, pure saturation.

The thing is that the COVID19-hit services have to rise $4 for every $1 pullback in the goods sector just to stay even. But nobody talks about this potential fatigue in these areas of spending that hit the lights out in 2020. Why?

Then I'm told that we are going to be seeing jobs come back in a major way. That's an assumption, in any event. But the problem here is that incomes have done better with the massive job loss than if the pandemic had never happened.

Many of these low-paid workers who are unemployed are doing better income-wise than had they been employed because of the unpreceden­ted income transfer from the federal government. Not to mention all the folks getting these transfers who don't need the benefits at all.

What happens to incomes when the benefits fade, even with the extra jobs?

Seriously, more than half of the lost jobs have come back in the past six months, but incomes have fallen in three of the past four months because government support started to fade. Next thing you know, we need US$900 billion (US$2 trillion?) of fresh government relief to avoid another recession.

Think of it this way, on a yearover-year basis, employment is down 6.1 per cent but personal incomes are up 3.8 per cent. Go figure that one. It's because income transfers from the government have expanded 18 per cent. Normally, a 6.1 per cent decline in employment would see incomes down four per cent. Not this time.

We have reached a situation where government benefits now make up nearly 20 per cent of total personal income — the peak was 31 per cent in April. But let's just say that never before in recorded history, and that includes the horrible 2008-09 Great Recession, has the income share accounted for by government benefits been as high as is the case today. Now, that is what I call a depression.

Not only do we have a situation where the oversatura­ted goods sector offsets the pent-up demand services sector in 2021, but, barring endless government transfers, the pullback in this support could also end up swamping whatever organic wage growth we get from returning service sector workers. The plunge in incomes from July to November, even with stepped-up job growth, provides some proof in the Christmas pudding.

The stock market has been given a long fuse, because the valley it is allowing itself to look over is at least six months long. At some point, however, reality will set in. The V-shaped recovery thesis for 2021 is as overdone now as it was heading into the final few months of 2020 — at least, absent any recurring fiscal stimulus. That makes the Georgia senatorial run-off elections on Jan. 5 that much more important.

 ?? SCOTT HEINS/ GETTY IMAGES ?? Shoppers seek out last-minute gifts at Macy's flagship store in Manhattan on Christmas Eve. Spending growth in the goods sector actually benefited from the pandemic, writes David Rosenberg.
SCOTT HEINS/ GETTY IMAGES Shoppers seek out last-minute gifts at Macy's flagship store in Manhattan on Christmas Eve. Spending growth in the goods sector actually benefited from the pandemic, writes David Rosenberg.

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