Insights / Research BriefMay 08, 2020

The Cost of the COVID-19 Crisis

Lockdowns substantially lower consumer spending, decrease employment, and lower inflation expectations, but they raise unemployment rate expectations, putting additional downward pressure on aggregate demand.

Using customized large-scale surveys, this work provides real-time estimates on the changing economic landscape following lockdowns. The authors find that consumer spending for a typical US household dropped by $1,000 per month, which corresponds to a 31% drop in overall spending. Households also spent substantially less on discretionary expenses and decreased their planned spending on durables, with an average drop in spending on durables of almost $1,000.

Strikingly, they find one of the largest drops occurring for debt payments. This result highlights the possibility of a wave of defaults in the next few months, which could ultimately affect the financial system, slow the economic recovery and explain the recent increase in loan provisions by major US banks.

In line with these negative outcomes at the individual level, households’ macroeconomic expectations have become far more pessimistic. Average perceptions of the current unemployment rate increased by 11 percentage points, with similar magnitudes for expectations of unemployment over the next three to five years, indicating that households expect the downturn to have persistently negative effects on the labor market. Consistent with this view, inflation expectations over the next twelve months dropped sharply on average while uncertainty increased. Current mortgage rate perceptions as well as expectations for the end of 2021 dropped on average by about 0.4 percentage points with even larger drops in average expectations over the next five to ten years.

The negative effect on long-run expectations suggests that the lower bound on nominal interest rates might be a binding constraint for monetary policymakers for the foreseeable future. Increased uncertainty at the household level and the large drop in planned spending point toward some form of liquidity insurance to curb the desire for precautionary spending and stimulate demand once local lockdowns are lifted.

Finally, to assess the economic damage that households attribute to the virus, the authors elicited information on the perceived financial situation of the survey participants and possible losses due to the coronavirus, both in income and wealth. Forty-two percent of employed respondents reported having lost earnings due to the virus with an average loss of more than $5,000. More than 50% of households with significant financial wealth reported having lost wealth due to the virus and the average wealth lost is at $33,000. This decline in wealth is putting further downward pressure on future consumption.