Just when consumers think it’s safe to draw down their pandemic reserve of toilet paper, many are finding stockouts and price increases on other products. Unexpected price increases on everything from pickup trucks to poultry are raising questions about when consumer product markets will return to normal.
It may take a while. According to our analysis at the McKinsey Global Institute, the Covid-19 pandemic interrupted a long-term trend of the share of services in household consumption rising and led to an unexpected spike in demand for products. We think there’s a strong case that this may not change anytime soon even with the latest element of uncertainty caused by the Delta variant.
But before we get there, take a look at what’s been happening.
For about 60 years prior to the pandemic, U.S. household share of spending on products, from cars to kitchenware, had been decreasing, as consumers spent an increasing share on services such as eating out and travel.
Then came Covid-19 lockdowns, social distancing, and travel restrictions which upended long-standing consumer behavior.
From the first quarter of 2020 to the first quarter of 2021, spending on durable goods (products with an expected lifetime of more than three years) like recreational products, furnishings, and motor vehicles, increased almost 32% and spending on nondurable goods (products with an expected lifetime of less than three years) like food and kitchen equipment rose 8%. During the same period, consumer spending on services, like restaurants, hotels, and travel dropped 3%.
The unexpected surge in demand for consumer products has been accompanied by supply chain disruptions. Many suppliers were surprised by the surge in goods demand, not usual during an economic downturn, and found themselves scrambling to meet demand. This surge in turn led to bottlenecks in critical supplies that slowed production of consumer products from cars to computers.
Additionally, global shipping capacity was hit by congestion in U.S. ports, as the skewed trade growth overwhelmed the infrastructure both in ports and their associated roads, rail, and warehousing, while terminals were hit by longshoremen out with Covid, there were other blockages, like the one in the Suez Canal.
That means in a variety of consumer product markets, supply has not kept up with soaring demand, hence shortages and unexpected price hikes.
So why might this not change any time soon?
Not only will it take time for conditions on the supply side to ease as ports add capacity and companies build more resilience into their supply chains, but strong U.S. consumer demand for products is likely here to stay, at least in the medium term. That’s true for several reasons.
First, home nesting, a consumer behavior adopted during the pandemic, looks sticky especially among white-collar workers. Work from home is expected to remain 20% higher than it was pre-Covid while business air travel is expected to remain 20% lower. Home nesting has resulted in more money spent on the home, for example on remodeling, new furnishings, and electronics. We expect this behavior to continue as consumers spend more time in the home than pre-Covid.
Second, strong consumer spending is being financed by savings accumulated over the past 12 months. In the U.S. last year, the savings rate more than doubled from 2019 as those able to work from home continued to earn income yet were not able to spend due to lockdowns and travel restrictions. Accumulated savings by high and middle-income households indicate sufficient disposable income to maintain demand for products even as the economy opens up and spending on services rebounds.
Third, strong GDP growth continues to be fueled by federal government spending. Stimulus programs to date amount to about 26% of GDP in direct transfers, tax cuts, and other programs. Strong economic growth in turn underpins consumer demand for products and services.
Fourth, the ongoing global vaccine rollout (about 29% worldwide first dose vaccination as of the start of August) may extend elevated goods demand as some services remain constrained and in particular as many international travel restrictions remain in place, holding back U.S. consumer spending on travel.
Fifth, robust new business growth in the U.S., currently about 1.7 times historic trends, is adding to the demand for printers, vans, and other durables as many new small businesses are setting up shop and expanding.
Sixth, supply chain constraints have extended delivery times in many areas, such as cars and RVs, potentially creating a long tail to catch up and fill inventory. We estimate that U.S. retailers need to replenish their warehouses by $55 billion to reach pre-Covid levels.
Finally, the pandemic has had an uneven impact across product categories. For instance, clothing and footwear was negatively impacted by the pandemic, but with reopening, may now be poised for growth as consumers resume shopping for a wider array of activities.
Adding up all these reasons, we think we have a compelling case for why strong consumer demand for products in the U.S. is here to stay for a while longer. And that means it might not be time to draw down those strategic reserves of your favorite products just yet.
This commentary initially appeared in Barron’s.