The Deceptive Recovery in Retail Sales Can’t Last

Retail sales climbed back to record levels in June and continued to grow in July and August—despite painful levels of unemployment and income loss. But the good times will not last much longer. The massive government income support programs that funded consumer spending are ending, while shoppers will need to resume normal household necessities like rent and health care.

Over 25 million Americans are out of work and collecting unemployment insurance. Millions more unemployed workers don’t even qualified for benefits. And millions of gig workers have experienced significant income declines. Yet retail sales in the U.S. are back to their highest levels ever—just months after the retail sectors endured its sharpest decline on record.

A closer look at the sales data reveals that all is not well at the nation’s shopping centers and along our main streets. The picture painted by the broad brush of total retail sales figures obscures the reality that the pandemic is cleaving the retail sector into distinct winners and losers as households make major profound shifts in what, how, and where they buy. More people are buying a lot more online than ever before—not just more stuff overall but more types of goods (especially groceries and personal care items) and even services (like prepared food and cocktails).

Beyond new ways of shopping, more profound have been the wide-ranging changes in the composition of the household shopping basket. Confined to our homes, we’re spending more on eating at home and upgrading our houses and gardens, to the benefit of grocers (+9.4% this year) and home improvement stores (+9.8%). On the other hand, restaurants (-16.6%) have been devastated by government restrictions as well as consumer fears of contracting the virus.

Other clear losers in the pandemic economy have been department stores (-14.8%) and especially apparel stores (-21.2%). Both have been crushed by the fall in socializing and entertainment options, as well as the shift to working from home. With fewer opportunities to dress up. we just don’t need as many new clothes or accessories. And with so many people out of work, mid-priced retailers also have been hurt by consumers’ need to economize, to the benefit of discount stores (+4.1%), such as warehouse clubs, superstores, and dollar stores.

A Rebound Less than it Seems

Regardless of the distribution of retail sales across different sales categories and channels, the paradox remains: How can total retail spending be back up to record levels exceeding pre-pandemic volumes when so many households are obviously still struggling financially?

I offer three factors. Far and away, the most important reason is the unprecedented level of income support from the federal government. Collectively the Bureau of Economic Analysis (BEA) reports that COVID-related programs accounted for 15% of all personal income in April and still amounted to 8% in July. And unemployment insurance, which pre-COVID typically accounted for 0.2% of personal income, soared to 7% in June. Add it up and the combination of COVID-related federal and state government programs accounted for an astonishing 14% of all income in July, though this support fell by almost half in August with the expiration of some COVID programs.

Second, and directly related, CARES didn’t just stabilize aggregate income in the country but actually raised incomes for most Americans. One study estimates that two-thirds of unemployed workers eligible for unemployment benefits were able to receive payments exceeding their lost earnings, with a median compensation 34% greater than their prior wage income. And millions more low- and moderate-income households got a meaningful one-time income boost through the EIP payouts.

Flush with this cash, even out-of-work Americans were able to afford groceries and other necessities. But they didn’t spend all of their extra income. In fact, most people either saved most of their stimulus payments or used them to pay down debt. With the income saved, many households have been able to maintain their spending even once their unemployment benefits and other CARES income expired.

The final reason consumers could maintain their spending on retail goods and services is by cutting back on other spending elsewhere. Retail sales account for less than half of all consumer spending  What else do consumers buy that are not considered retail sales? Housing, utilities, education, most health care expenses, travel, and most forms of entertainment, to name some of the biggest items.

And households have been cutting back on all sorts of non-retail expenses. Due to eviction moratorium for qualifying renters and mortgage forbearance protection for homeowners, many unemployed workers have reduced their housing costs, at least for a while. Despite the pandemic, spending on health care is down because medical providers have sharply reduced discretionary office visits and hospital procedures. Fewer students are attending college and paying tuition. And of course, travel spending is way, way down.

In sum, I estimate based on BEA figures that total non-retail consumer spending is down 7% this year, while retail sales over the same period were up over 1% (Fig. 5). Thus, households could afford to keep spending on retail goods and services—whether online or at the mall—only by cutting spending elsewhere.

A Sustainable Recovery? Not Likely.

Absent another major federal stimulus package, retail sales growth will reverse course this autumn.

• First, the pandemic income support programs are largely gone, and six months after the CARES Act was signed into law, Congress evinces little likelihood of extending, expanding, or replacing the measure. And more job cuts are coming, The end of pandemic income support and the coming wave of additional layoffs will sharply cut consumer income, thereby reducing all types of consumer spending.
• The accumulated savings that households have socked away will help sustain spending for a while but won’t last long. As consumers begin to tap into their savings, they inevitably cut back their spending further until their employment prospects improve.
• Finally, retail sales will fall because households won’t be able to defer their non-retail spending indefinitely. Eventually, the missed housing payments must be repaid. Eventually, people will begin to incur more medical expenses.

Taken together, it seems certain that—again, absent additional government interventions—retail sales will soon fall again and remain depressed until the pandemic eases and the economy recovers. And for that we need wide adoption of a safe, effective vaccine. I’m waiting.

You can read here the full analysis here.