by Greg Grootendorst, Chief Economist and Katherine Rainone, Regional Economist
The U.S. economy is continuing its recovery from the shock of the COVID-19 pandemic, notching 4% growth in GDP for the 4th quarter of 2020 (seasonally adjusted annualized rate). Consumer spending accounts for the lion’s share of gross product; at the close of 2020 over two-thirds of GDP was derived from consumer spending. Since consumption is a human behavior, what are consumers spending their money on during this recession, and do their emotions have any effect on the continued economic recovery?
Personal Consumption Expenditures (PCE) are split between goods and services. Goods consist of both durable goods, such as cars, furniture, electronics, or jewelry, and non-durable goods, such as food and alcohol (for off-premises consumption), gasoline, clothing and footwear, or household supplies. Alternatively, the services sector consists of intangible goods, such as restaurants, health care, airline travel, hotels, hair salons, childcare, and more.
Within expenditures on personal consumption, roughly 70% of expenses are typically spent on services, while the other 30% are spent on goods. Over the past year however, that ratio has changed as the pandemic has changed daily life for so many Americans. Initially, spending on both goods and services rapidly declined as the impact of the pandemic swept across the country, and the economy. As the world adapted to life during a pandemic, and as the economy began its recovery, the virus still maintained a level of control over the services sector. In today’s recession, affluent consumers have done relatively well economically – most have remained employed at pre-pandemic salaries and are no longer able to spend discretionary income on things like travel and eating out due to restrictions, so may instead be spending more on goods (electronics, pools, at-home exercise equipment, etc.). Those affected financially by the pandemic still are purchasing essential goods like food, gasoline, clothing. This national shift in consumption is depicted in the chart below, showing the share of expenditures on goods and services splitting after the initial dip in total consumption in April 2020.
Figure 1: United States Personal Consumption Expenditures, breakdown between expenditures on goods versus services.
While national expenditures on goods are at record highs, so to are retail sales in Hampton Roads. The region has experienced record-breaking retail expenditures towards the latter end of 2020, despite record levels of unemployment claims, a looming evictions crisis, and lower (but trending upward) consumer confidence indexes. Typically, when consumers are confident, they tend to spend more, and when they are less confident, they tend to spend less. However, these indexes often do not tell the whole story because the “average consumer” does not exist. These trends of increasing retails sales and increasing but diverging personal consumption expenditures between goods and services reveal that this economic shock is different than any that we have experienced in the past. As the recovery continues, signs are pointing towards a slowdown in regional retail spending. If the virus slows enough to allow some expansion in the services sector, Americans may move their discretionary income back to things like air travel, spas, club memberships, and events. If unemployment remains elevated, thus decreasing discretionary expenditures, retail sales could continue to slow down, and further stall the economic recovery.
To view February’s full economic monthly report, click HERE.
Annualized Growth in GDP
Gross Domestic Product combines consumption, investment, net exports, and government spending to determine the size and general health of the economy. Real GDP increased 2.1% in Q4 2019 (GDP also grew by 2.1% in Q3 2019). The growth is driven in part by consumer spending, government spending, housing investment, and exports, while imports decreased. There was a decrease in inventory investment (-1.09%) as well as a reduction in business investment reflecting a decrease in structures and equipment.
Retail sales in Hampton Roads, as measured by the 1% local option sales tax, serve as an indicator for consumption in the region. Retail sales have bounced around, but after a surprisingly weak June, they continue to recover handily through to December (seasonally adjusted 3 month M.A.). Sales increased by 7.4% in December, making it Hampton Roads’ best December for total retail sales in recent years. Much of the recent growth in retail sales across the Commonwealth has been the result of increases in the number of online sales that are subject to tax.
New Car Sales
Car sales, as a durable good, may be put off until an individual’s economic prospects improve; thus, the number of new car sales indicates the level of confidence that households in Hampton Roads have in their financial future. Car sales have decreased and stabilized after an unusually strong September, hovering near the averages that have been observed over the past few years.
Hotel sales indicate the performance of the region’s tourism sector. In Q3 2019, accommodation sales decreased by 3.5%, settling at $220 billion for the quarter. This continues a pattern of slowing sales between second and third quarters in recent years, however, Q3 accommodation sales in 2019 increased 5.4% over Q3 2018. This shows accommodation sales are still trending upward from late-2013 lows.
Non-agricultural civilian employment figures are considered the best estimate of labor market activity by the National Bureau of Economic Research. According to data from the Bureau of Labor Statistics, Hampton Roads employment increased for the third month in a row since a recent high in June, to 796,600 positions in December of 2019. This figure represents a 1.05% growth from the same month in the previous year.
Employment Growth by Industry
As the job market grows or declines, there will be some industries whose experience does not resemble the regional trend. Several industries have seen significant decline year-over-year using BLS data, including Administrative & Support and Local government. The Construction and Leisure & Hospitality industries continue to see the largest increases in jobs when compared to the previous year, signs of strength due to their key role in the regional economy.
The unemployment rate is the percentage of the population actively seeking work but unable to obtain a position. Hampton Roads’ unemployment rate plateaued in December 2019 at 2.93%, the same rate it was in November. Comparatively, the national unemployment rate decreased again in December from the previous month to 3.5%, hovering at record lows.
The number of initial unemployment claims is a leading economic indicator reflecting those who are forced to leave work unexpectedly, thus revealing the strength of the job market with little lag time. Seasonal adjusted unemployment claims decreased in January 2020 to 2,438 claims, a decrease from December of 2019 but still above November’s recent low. This January number of claims represents a 17.6% decrease from the same month in 2018.
Permit data signals the level of construction employment and confidence regarding the future trajectory of the local economy. The level of new construction permitting for single family homes in December decreased to 352 permits, but when seasonally adjusted represents a slight increase relative to November. As the market continues to respond to the recently lowered federal interest rates, this indicator will be interesting to watch closely.
Home Price Index
The home price index measures the value of homes by evaluating changing price levels through repeated sales of properties. The index provides the highest quality data available on the trends in the real estate market. Hampton Roads’ home prices increased, yet again, by 4.2% over the previous year in Q3 2019, remaining below both the state and the nation. Regional housing values remain 4.3% below those seen during the peak of the housing boom.
Settled Home Sales
Settled home sales measure the level of transactions on the real estate market over time, and a healthy real estate market should have a consistent level of activity. The levels of existing home sales have been strong recently, with sales maintaining the same average level as during the housing boom in 2005. New construction sales in January saw a slight dip from December, continuing to represent roughly 11% of all sales.
Foreclosures have a significant impact on the real estate market and community, depressing home values on a neighborhood and regional level. Distressed homes’ share of total sales has particularly been shown to impact the sale price of existing homes. The foreclosure level is still elevated from the housing boom, but has been steadily declining, showing some of the lowest rates since 2009. Foreclosures constituted 4.2% of all home resales in December of 2019, down from a recent high of 8.1% in April of 2016 (12-month average).
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