Month: October 2020

COVID cocoon spending jumps

Background

We’ve seen spending recovering over the course of the COVID pandemic; as summer wound down, August 2020 personal consumption spending was only 2% below August 2019.  But given that some spending is still depressed (hotels, airlines, public events), where has spending increased to compensate?  We already know Americans are getting outside more than the rest of the world – see a previous post.  But what is driving at-home COVID cocoon spending jumps?

Findings

  • Living costs – gotta eat and clean:   Grocery purchases are up 10% (over $8B/month), along with household supplies (10%).
  • Working costs:  Electricity costs are up 8% as people use more at home.  Computer and software spending is up 19% which one would think is work related, unless it’s a rush to play Call of Duty or Fortnite.
  • Playing costs:   The recreational category, driven by games, hobbies, and pets, is up 13%.  There has also been a big jump in spending on household furnishings as we turn our eyes to improving our homes.
  • Reading?!? – The newspaper and periodicals category is up 24%/$1.1 billion a month!  The BEA indicates that the big jump was in digital subscriptions in April and May.  Conde Nast reports a doubling in new subscriptions.  

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Implications

It’s obvious that when we spend more time at home, we spend more money at home.  That part of these findings is unlikely to shock anyone.  Of more interest is the impact of the trends of COVID cocoon spending jumps:

  • Will employers compensate for home office expenses?  Electricity and office furnishings are added expenses to working at home.  Of course, they’re offset by lower costs for commuting and clothing (both of which have dropped in the past 6 months) so perhaps we call it a wash.
  • Will the home nesting projects continue?  At some point, presumably we will have redone the guest room, replanted the garden, and painted the kitchen.  Subsequently, spending on home improvements should fall.
  • Will reading make a comeback?  Whether we are seeking more pleasure in reading, more information during the campaign cycle, or just something to peruse in the bathroom, this is an interesting trend that might suggest a return to quieter pleasures.

The small print

The spending data comes from the BEA.  The spending increases are not adjusted for inflation, though inflation was very low during the last year so this doesn’t change the conclusions.  The changes in spending vs. August 2019 are almost the same as if we compared to February 2020, the last pre-pandemic impact month.  Household supplies is primarily cleaning products and paper products.

Consumer freedom or addiction? 100 years of breakthrough banking innovation

Visual presentation of 100 years of financial services innovation showing many examples of products that make it easier to borrow and easier to spend.

Background

If you have a bank account with a large institution, their website probably has a section intended to help you track spending and design a plan to save for retirement.  At the same time, the history of financial services is 100 years of breakthrough banking innovation that makes it much easier to borrow, and to spend, money.  People have responded by…borrowing and spending more money.  Previous posts looked at the increases in household spending which have been dramatic.  This article looks at how 100 years of breakthrough banking innovation has made it easy to borrow and spend, and the impact on household debt.

Findings

  • 100 years of encouraging borrowing:   In 1916 GMAC finance created the auto loan.  Since then we’ve seen federally guaranteed home and student loans, HELOCs, and credit cards being introduced.  In tandem, we’ve seen incentives from government to buy homes.  Think mortgage interest deduction, and Fannie Mae ensuring a market for home loans.  Student loans, also federally guaranteed, have jumped to $1.5 trillion currently owed.  Auto loans and credit cards have become the norm for many households.
  • Products that encourage more spending:  Does anyone remember paying for groceries with a check, or even cash?  A series of innovations in purchasing have created great convenience for consumers.  ATMs let you get cash 24/7. Contactless payment lets you wave your phone to pay.  New credit card policies for many issuers and merchants omit the need for signatures.  PayPal is introducing “Pay in 4”, the ability to buy now and pay over 4 months, essentially the modern digital version of buying on credit.
  • More spending and higher debt:  The aforementioned posts on this site look at the substantial increase in household spending, particularly on homes, cars, and education.  The chart below shows that household debt has doubled since 2003.  

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Implications

We live in a time of financial double-edged swords.  The convenience of easy payment, and the ability to borrow in so many ways, enables people to do things they might have only dreamed of in the past.  At the same time, this convenience leads to more spending and more borrowing.  The Pandora’s box of cool innovations is open and likely will generate new products as Fintech creativity continues to disrupt the industry.  How do we help the customer manage their finances?

  • Serious help – Financial institutions need to be serious about their efforts to reach out and help their customers be intentional about their plan and actions. This means more than a tab on a website, it means talking to customers (live or virtually) and collaborating on how to reach long-term goals.
  • Positive innovation – We’ve seen Fintech services that help consumers track how they’re spending and saving.  Uptake and usage have been slow.  There is an opening for something better – but we haven’t seen it yet.
  • Finding the moral balance – Let’s face it, if you are a bank that makes money from fees, and from interest on home loans, credit cards, and other household debt, there are pressures to maximize near-term revenue.   On top of this, more sophisticated banks focus on selling you the product you’re most likely to buy next. This isn’t customer focused. The long term approach means not pushing your customers to borrow or spend more, rather take a holistic view.  Noble statements saying you want to help cusstomers succeed are great, but some financial institutions need a cultural reality check.  If customer long term success is important, then approach them with holistic help, not product sales.

The small print

To be purer in the analysis of growing spending and debt, we should also look at rises in income.   If you make a lot more money, maybe more debt isn’t so bad.  If you don’t adjust for inflation, the average household income rose 59% from 2003 to 2019 during a period when debt doubled.  Debt rose faster than income.   This also doesn’t account for the increased income being concentrated in the most affluent households, while debt and spending have grown across most households.