Insights / Podcast episodeJun 18, 2020

Episode 10: Meet the COVID-19 Consumer

Consumer spending is one of the most important indicators of economic health. In this episode, Michael Weber and Constantine Yannelis share research insights on the effect of pandemic and federal stimulus policies on spending, and what these trends tell us about an economic recovery.

View Related Economic Finding from Michael Weber

View Related Economic Finding from Constantine Yannelis

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Unedited Transcript

TESS VIGELAND: Back in March, as states started going into lockdown, the gears that kept the economy flowing also ground to a halt. People stopped spending money.

EDUARDO PORTER: And the recovery will depend on when they start spending it again.


TESS VIGELAND: This is Pandemic Economics, a podcast about the global impact of COVID-19 from Stitcher and the Becker Friedman Institute for Economics. I’m Tess Vigeland.

EDUARDO PORTER: And I’m Eduardo Porter. We’ve been invited to have this series of conversations with University of Chicago economists.

TESS VIGELAND: And in this episode, we’re taking a look at one of the most important economic indicators of all– consumer spending.


When people stop spending money, it has an enormous effect on just about everything. And Eduardo, despite any other type of recovery, including the stock market, if people don’t spend money, the economy stays in a recession. And I think that’s been a source of confusion for Americans recently.

EDUARDO PORTER: Yeah. It’s very clear that we have the stock market reacting to fed policy. So as long as the investors have this confidence that the Fed is going to keep pumping money into the economy, buying all sorts of bonds, this money is going to go somewhere, and it’s going to seek assets to buy, and stocks are those assets.

TESS VIGELAND: Stocks are part of those assets but that does not put money into people’s wallets.

EDUARDO PORTER: That’s true. It’s totally divorced.

TESS VIGELAND: And for the general consumer, they just have to understand that what they’re seeing in terms of stock market movement is not reflective of what’s happening in the overall economy.

EDUARDO PORTER: And who knows what the stock market is going to do over the next two weeks, let alone the next two months, right? It’s just up 20%, then down 6%, and then who knows what?

TESS VIGELAND: Exactly. And yet, at the same time, we’re not seeing hiring go up 20% and then down, which is really the important part of what’s happening right now. Because if hiring doesn’t happen, people are not going to start opening their wallets again. So we’re going to talk with Constantine Yannelis and Michael Weber of the Booth School of Business. Michael and his co-authors conducted a study to see when and how people stopped spending as the pandemic began. And Constantine and his co-authors looked at how people spent their stimulus money, if at all, and what that means for any sort of economic recovery.


Michael, you were really breaking it down to the family and individual here. So I wanted to first ask you what you found about how people are feeling about their financial situations, or at least what they were when you conducted the survey. What did your respondents report?

MICHAEL WEBER: Yes. So imagine you ask, households, how concerned are you about the current situation on a scale from 1 to 10, with 10 being most concerned? You see, actually, that the median answer is actually the full blown 10.


MICHAEL WEBER: Just giving you an idea that, as of early April when we conducted the survey, people had a very pessimistic outlook, both actually for their own personal financial situation but also for the overall economy.

TESS VIGELAND: Well let’s look specifically at what you both found in terms of the public basically shutting their wallets during lockdown. Clearly, nobody going shopping, nobody going to restaurants, at least in person. But how much did aggregate spending drop? And where did that money go instead? Did they move it to savings? Did they put it under the mattress? Michael?

MICHAEL WEBER: We just asked our survey participants, over the last three months, by how much did you actually spend in different categories. And what you see here is that overall the spending per month on average dropped by a staggering 25 percentage point or, differently, on average I typically spend like $5,000 a month, but now actually during the height of the pandemic my spending dropped to about less than $4,000 US.


MICHAEL WEBER: So if I’m actually in an uncertain situation, and I don’t know whether I will still have a [INAUDIBLE]job in, let’s say, a half year down the road, I might actually just starting to spend less and start increasing savings to actually have somewhat of a cushion in case, actually, the bad state of the world might materialize.

TESS VIGELAND: So people really went back to the basics of just putting the money in the bank.


TESS VIGELAND: Constantine, you were looking at where the money went from the CARES payments. And again, some people got $1,200 checks, some people got less, some people got money as well for their children. What did you find in terms of where that money went?

CONSTANTINE YANNELIS: So we found that the largest category in which individuals were spending money was food. They also spent in other areas, like household items, restaurant deliveries. And this actually looked fairly similar to previous stimulus payments in most categories with one notable exception, which actually is important in aggregates, and that’s durable spending. By durables, I mean things like cars, washing machines, computers–

TESS VIGELAND: Refrigerators.

CONSTANTINE YANNELIS: Exactly. That kind of stuff. We also found that a significant portion of the stimulus payments went to meeting various spending commitments, such as mortgages and credit card payments.

TESS VIGELAND: What about who was spending? Michael, as you note in your paper, there was a lot of discusiiondiscussion about whether stimulus money should go to people with higher incomes and who hadn’t lost their jobs or whether it should be reserved for those who were in the most dire of straits. What did you find in terms of where the money went, depending on the financial situation that people were in before the pandemic?

MICHAEL WEBER: Yes. So this is actually a very interesting point. So if you give people $1 to spend, typically you see it’s actually those called hand-to-mouth consumers, meaning households, with very little savings on hand. They would typically actually consume the largest fraction of that dollar versus if you give it to a high-income households.

They would just put it in their bank account, and you wouldn’t find any of this the so-called multiplier effect in the sense that I spent my dollar, then the person selling me something actually earns a dollar , can himself actually now purchase goods and so on. Instead, actually, this time, you actually find that it’s especially households that are in the mid and upper range of the income distribution that actually cut their spending by less.

Or saying it differently, it is, at this time, especially households that have very little savings, that actually have low income. They actually tried to make sure that, in case I lose my job or I have to cut my hours even further or I’m not being recalled by my employer in a few months once the pandemic is over, I still actually have enough cash on hand to be able to sustain my lifestyle and support my family.

TESS VIGELAND: Why do you think that difference came into play?

MICHAEL WEBER: I think this is partially due to the fact that the recession this time has just arrived so swiftly and quickly. We have never seen such a stark rise in an initial claims within such a short period of time. But I think actually just the strength, depth, and the size of the stocks are unprecedented, at least all the way back to the Great Depression. And so, therefore, I think actually things might look slightly different than from our conventional recession.


TESS VIGELAND: Coming up, we’ll talk about where else Americans have clamped down on their spending, and that’s in paying off debt– another sign that any sort of recovery may be a long ways off.

EDUARDO PORTER: Stay with us for more Pandemic Economics in just a minute.


TESS VIGELAND: Let’s talk about debt– mortgage debt, car payments, rent, credit card debt. Constantine, you already brought these up as one of the major categories of spending for the stimulus money. Michael, these categories are generally not discretionary spending. What did respondents tell you about whether or not they kept making those payments?

MICHAEL WEBER: Yeah, that’s actually a potentially very worrisome development that we actually highlight in our paper. So on the one hand, the average household cut their spending on debt payments by about $400 per month. I think that’s about 12% of households that stopped servicing their debt altogether.

TESS VIGELAND: Huh. So they stopped paying the mortgage, they stopped paying the car payment, stopped paying rent– whatever their situation was?

MICHAEL WEBER: Indeed. But actually even among those that continued paying some debt, you see actually that’s what we call the intensive [INAUDIBLE]margins in the sense, how much debt do you repay conditional on repaying any debt? This much and also it’s actually reduced by 15%. So therefore, not only do we see less people actually service their debt, but conditional on servicing the debt, it also looks like people actually make only partial payments.

Now, of course, what does this mean on the flip side? On the one hand, you might be concerned that you might also have financial institutions seeing actually fallouts down the road, which might actually help partially explain the increase in loan loss provisions. Like, if I’m a bank, and I have a big outstanding debt portfolio, I might actually take into account that there’s a chance that borrowers might not repay, and so, therefore, I already might have some loan loss provisions to account for future defaults.

TESS VIGELAND: So the banks are having to follow this as well and change their behavior.

MICHAEL WEBER: Exactly. So banks will have to adjust their behavior which, of course, then, if I have to keep money on my balance sheet because I see the risk that actually households might not pay back is, of course, also might actually put a downward pressure on my new loan supply.

TESS VIGELAND: So people aren’t paying their mortgages. They’re not paying their car payments. So the bank has that on the books, and, therefore, they are not as willing to lend out to businesses or pretty much anybody else.


TESS VIGELAND: Then what does this information about debt payments and, really, non-payment tell us about the effects of that on the economy moving forward and our ability to somehow drag ourselves out of this recession? Constantine, clearly having a lot of debt on the books and people not paying their bills is problematic in the long term.

CONSTANTINE YANNELIS: Certainly. And a major concern about this crisis is that, even if the health situation improves in the medium term, which may very well happen, and which may be great, is that we’re going to be stuck for a long time with the knock-on effects coming from increased levels of debt.

TESS VIGELAND: Michael, what about you, in terms of this ongoing debt problem– people not paying their bills?

MICHAEL WEBER: We see that for many financial institutions, it is actually in the best interest to offer households various ways of only making partial payments to, let’s say, their mortgages and credit cards in the hope that they might recoup the outstanding payments at a later date. So therefore, we don’t see bigger waves of households defaults and foreclosures. To the extent we can actually prevent consumer defaults going forward, I think actually will be a crucial ingredient to ensure we do not have a protracted recession.

TESS VIGELAND: Michael, in your survey, did you get a sense at all of how much the clamp down on spending would or could last? Like, what will loosen wallets again?

MICHAEL WEBER: Yeah. So at least when we fielded our survey, we are asking them, now in the height of the COVID-19 pandemic, did you change your plans to purchase durables? And the reason why we focused on durables, so larger ticket items like electronics, washing machines–

TESS VIGELAND: Expensive stuff.

MICHAEL WEBER: Expensive stuff. Exactly. So therefore, we just asked individuals, do you think right now is a good time to buy larger ticket items? And actually, across the board, you will see a large cut in spending plans. For example, the fraction of the US population that has plans to purchase a car over the next 12 months was about 24% in early January, and actually went down to a little bit more than 15% in April of this year. So again, a very tremendous and large cut in the fraction of the population that plans to purchase cars.

TESS VIGELAND: So that’s a real downward spiral. Constantine, what brings us out of that?

CONSTANTINE YANNELIS: This crisis was caused by a new virus, and we’re not going to see things return to normal until either one of two things happen. One, either there’s vaccine and treatment, or two, there’s herd immunity. But I don’t think we’re qualified to say when this crisis will end as economists, simply because it’s going to depend on the health situation first and foremost.

TESS VIGELAND: So that really is all about uncertainty at this point.

CONSTANTINE YANNELIS: Yes. And one thing that’s very important is to think about how policymakers, households, and businesses should be making decisions. But one key takeaway is that if there’s more uncertainty, that’s a reason for caution, which is why we’re seeing households cut back spending.

TESS VIGELAND: Michael, any final thoughts from you, particularly in terms of looking at debt and spending at this point in the country?

MICHAEL WEBER: What determines how much I spend today versus tomorrow or don’t spend it all, how much I save versus consume, is heavily affected by my economic outlook. And at least here, through the lens of household expectations, you might actually see some very protracted recession, because, if I’m very pessimistic about the outlook of the US economy, I will not actually spend. And so therefore, the first and foremost channel for which I get the economy back on track is making sure that we fight the pessimism that is actually throughout the US economy, but that can only happen once we have actually a solution to fight the pandemic, which Constantine was saying can only occur after we have a vaccine.


EDUARDO PORTER: But until that happens, we will be dealing with an economic shock the likes of which the world has never seen before. In our next episode, we’ll hear how the lockdowns have produced an entirely new kind of recession.


Pandemic Economics is produced by the University of Chicago’s Becker Friedman Institute for Economics. Our producers are Devin Robbins and Dana Bialek. Our executive producer is Ellen Horne. Production and original music by Story Mechanics. Pandemic Economics is part of the University of Chicago Podcast Network. I’m Eduardo Porter.

TESS VIGELAND: And I’m Tess Vigeland. Thanks for listening.