Who’s Really Benefiting from the Surge in Consumer Spending?

Consumer spending is on the rise, and nearly back to pre-Covid levels. However, a look behind the data suggests a lagging economy for years.
small businesses
Small businesses are crumbling in the Covid-19 era, but large, publicly-traded companies seem to be doing much better. | Image: Justin Sullivan/Getty Images/AFP
  • Consumer spending continues to rebound from March lows.
  • There’s been a growing divergence between spending and small business revenue.
  • Consumers are spending more at big, publicly-traded businesses.

After dropping over 30% from its peak, consumer spending has nearly recovered. Now it’s down just 5% from its February highs. As with most of the economic data out there right now, amid that good news is some bad news, particularly for small businesses.

Consumer Spending Rises, But It’s Concentrated on Bigger Companies

The past few months have seen a continued rise in consumer spending, but when compared to the revenues of smaller businesses, there’s an increasing gap.

Consumer spending trends
Consumer spending is now down only 5% compared to the pre-pandemic era, but small business revenue is still down nearly 20%. | Source: Twitter

Small business revenue, which was growing by double-digits earlier in the year, remains down 20%. That’s a massive underperformance and one that suggests small business bankruptcies may continue for some time.

2020 is already on pace to see a larger number of corporate bankruptcies than in 2009 during the last crisis. Leading the way are oil and gas exploration companies, which have struggled with massive volatility in the price and demand for oil.

Corporate Bankruptcies
Corporate bankruptcies have soared at a faster pace than in prior crises despite the quick deployment of trillions in government support. | Source: Financial Times

While several well-known companies have gone bankrupt this year, and other publicly-traded firms still might, the real devastation has occurred with the bankruptcy of hundreds of thousands of small businesses. For many of these small operations, there isn’t even a formal declaration of bankruptcy. They’re simply shut down. That’s a lot harder to track.

Looking at these consumer trends, it’s clear that, going forward, the bulk of the damage will happen at smaller businesses, not larger ones.

Why Big Businesses Will Continue to Benefit

With a shift in consumer preferences, it’s easy to see why large, publicly-traded companies have benefitted from the trends this year. Lockdowns have been easier to manage for companies with a robust e-commerce platform.

Think of it this way: Retailer Best Buy (NYSE:BBY) reported fantastic earnings thanks to a 242% rise in its online sales as a work-from-home trend spurred consumer spending on electronics.

As customers reduced going out for breakfast or their morning coffee, it’s been great for consumer goods company J.M. Smucker Corp. (NYSE: SJM), which likewise reported a larger-than-expected boost in earnings.

And that’s to say nothing of the big tech plays that have made remote work for the bulk of the population possible over the past few years. Those stock plays have already received tremendous attention in this market.

It’s clear that these large companies will continue to benefit.

That’s why we can get a stock market rally at a time when hundreds of thousands of small businesses are going under. Those are the companies that will fare just fine amid changing consumer spending patterns. It will take years for small business formation to recover, as it usually does in a recession.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author holds no investment position in the above-mentioned securities.

 

Sam Bourgi edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

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