Consumption rose sharply for goods and services in the third quarter of 2020.

By Manuel Gutierrez, Consulting Economist to NKBA

 Q3 spending for Goods is at its highest level recorded, while Services remain 6.5% below peak

Total spending by consumers rebounded in the third quarter of last year by 10%, to $14.4 trillion. Consumer spending, known by economists as consumption, amounts to two-thirds of the Gross Domestic Product equation. Its direction heavily impacts the direction of overall GDP.

The third-quarter spike reverses spending declines from the first and second quarters, but does not fully compensate for the shortfalls. Spending is still 2.4% below its $14.8 trillion level from the fourth quarter of 2019.

As Fig. 1 indicates, spending for both Goods and Services rose in the third quarter. Goods jumped by 11.6% in the quarter, with Services growing by a slightly smaller 9.1%.

The two bottom charts of Fig. 1 show that consumer spending for Goods reached its highest volume over the last five years. In fact, the $4.9 trillion spending rate in the third quarter is a  record.

In contrast, while spending for Services was up, it’s still running 6.5% short of the peak level attained in the fourth quarter of 2019, when consumption of services reached a $10.2 trillion annual rate.

The faster recovery for consumer spending in Goods compared to Services is the direct result of shopping behavior changes caused by pandemic business shutdowns. Services have been negatively impacted because of their reliance on social contact, which consumers have been avoiding.

Fig. 2 highlights the shift away from spending on Services and toward Goods. The graphic displays major categories of consumer spending, comparing the change between the fourth quarter of 2019 with the third quarter of 2020.

Spending for virtually all Services categories has declined, with two notable exceptions: Housing & Utilities and Financial & Insurance. These categories reflect the desire to seek refuge in the home and also the reality that expenses within them, such as mortgage or rental payments, are fixed and can’t be modified.

On the other hand, spending for Goods has increased in most categories since the end of 2019. Only in two of those categories has it declined, Clothing and Gasoline & Energy. These are the result of new consumer patterns caused by the realities of the pandemic —  people who are working from home don’t need as many clothes for work or going out, and commuting and business travel are greatly curtailed.

In April 2020, 79% of employees were working remotely at least part of the time, but by the end of the third quarter, according to Gallup, that number had dropped to 58%.