Headlines Opinion

The Consumer Spending Decline Has Only Just Begun

Data show high unemployment will persist into 2021. The spillover effect on consumer spending could be devastating.

  • The stock market is expecting the economy to improve in 2021, but unemployment estimates suggest it won’t.
  • A sharp drop in consumer spending will likely continue well into next year as high unemployment persists.
  • The stock market is in for a rude awakening in August when consumers pull back once again.

The U.S. stock market has been mostly indifferent about dire unemployment figures and plummeting consumer spending.

Investors are willing to look past the terrible data because they’re expected to improve considerably as the economy continues to reopen. But new data suggest that although it will get better, it’s not going to be anywhere near normal for years.

Unemployment Will Persist

Data from ThinkIQ show that in New York City, employment will remain below pre-pandemic levels for at least the next six years. In 2021, the firm estimates that nearly 400,0000 New Yorkers won’t have their jobs yet.

If the NYC data were applied to the country as a whole, 14 million Americans would remain unemployed for the next two years.

Estimates suggest many New Yorkers will remain unemployed for years to come. | Source: Bloomberg

Notably, that would translate into a national unemployment rate of 8.6%, the highest in more than two decades. Even in the aftermath of the Great Recession, unemployment never rose above 8.5%.

Even after the Great Recession, unemployment never reached above 8.5%. | Source: Office of National Statistics

High unemployment levels are bad news for an economy that depends on consumer spending. Almost three-quarters of the U.S. economy is driven by consumer spending, and people without jobs don’t spend as much money.

In April, the U.S. saw a sharp 13.6% decline in consumer spending due to government shelter-in-place orders. But as the economy reopens, it’s worth noting that many of the lost jobs aren’t coming back.

Consumer Spending Will Drop Again

A study by the American Economic Review found that unemployed Americans stop spending when they lose their jobs—no surprise there.

The study showed that people claiming jobless benefits pull back even further roughly six months after losing their jobs. That’s because most states only offer six months’ worth of benefits. 

The study showed two sharp spending drops, one when a job was lost and another larger decline when benefits ran out. | Source: American Economic Review

Because of the pandemic, workers are now able to claim for 39 weeks. That would take most people up to January 2021. What does that mean for consumer spending? Likely that we’re going to see another big dip at the start of next year.

August is another crucial month for consumer spending as the government’s additional $600-per-week pandemic payments will run out in July. That means Americans who’ve been claiming during lockdown will suddenly see their monthly income fall by around $2,400. That’s certain to cause another significant pullback in spending, and one that many investors aren’t factoring.

What it Means for the Stock Market

It’s important to remember that the stock market doesn’t like surprises. Harmful data are never good for equities, but if it’s expected, it doesn’t tend to cause such a stir. Reams of terrible economic data have hit the airwaves in April and May, but investors continued to pour money into the stock market because they knew it was coming. 

From here on out, the stock market is expecting to see things improv—any data to the contrary, like a sudden crash in consumer spending in August, will drive share prices lower. 

Disclaimer: This article represents the author’s opinion and should not be considered investment advice from CCN.com.

Last modified: September 23, 2020 1:59 PM

Laura Hoy

Laura has been working as financial journalist covering US markets for more than a decade. Her work can be found in a wide variety of publications including Yahoo Finance, InvestorPlace, Nasdaq and Benzinga. Contact her at lmariehoy@gmail.com, see her LinkedIn profile here.