“Social distancing” and other large scale steps to contain the coronavirus will likely weigh on consumer spending in the near-term, and more generally fear and uncertainty may further curtail consumption. The latter are in no short supply lately due to the volatility in the stock market and constant deluge of negative news headlines related to the outbreak. One of the first March data points to provide evidence of this effect COVID-19 is having on Americans’ confidence was released this morning. Specifically, the University of Michigan’s consumer sentiment index fell to 95.9 in the first-half of March, the largest monthly drop since August. Outlooks on both current and future conditions deteriorated in March, but the report’s authors stressed that “the initial response to the pandemic has not generated the type of economic panic among consumers that was present in the run-up to the Great Recession … perhaps the most important factor limiting consumers' initial reactions is that the pandemic is widely regarded as a temporary event.”
Clearly there are a lot of unknowns still surrounding the coronavirus, and it indeed presents downside risks to the 2020 economic outlook. However, it is still too early to forecast an outright collapse in consumer spending, the largest component of gross domestic product (GDP) growth, because roughly half of Americans’ consumption typically goes to non-discretionary items such as housing, utilities, healthcare, food, and telecom (see below). The other half of consumer spending, though, is much more exposed to potential virus-related cutbacks, and this could very well be a big drag on broader economic growth in Q1 and Q2. On the bright side, if the containment efforts that cause this disruption to consumption are effective at stopping the spread of the virus, then an even stronger bounce back in the second half of the year would not be surprising, especially if coupled with cheap gasoline prices and further monetary and fiscal easing in the weeks and months ahead.
Sources: Econoday, UoM, U.S. DoC, Wells Fargo, FRBSL