Connecting consumer spending to the economy of 2022
“If there’s one thing the pandemic has taught consumers, it’s the importance of having a budget. When you know where your money is going, it can be easier to isolate needs and wants and focus more on necessities. -James Boyd, TD Ameritrade-
Is the world out of the era of COVID-19?
Two years into the pandemic, consumers around the world have found they can shop online more easily and save time for other commitments. As a result, manufacturers and retailers have also had to adapt to make online shopping experiences more rewarding.
Is the world out of the era of COVID-19? Is the recession still coming or is it already here? What is the effect of inflation on people’s spending habits? How have consumer spending habits since the pandemic affected the economy?
These are some questions on the lips of several economists as they study the relationship between economic change since the pandemic era and how it has affected consumer spending habits. These are the questions my associates and clients discuss on a daily basis.
The effect of the pandemic on financial security
The pandemic wave has given rise to a new pattern of consumption footprints. A Nielsen 1Q study identifies five new cohorts of consumers based on the economic impact of the pandemic on their financial security and spending habits.
Twenty-three percent of respondents said they struggled with financial instability during COVID-19 and to date.
Twenty-one percent of individuals are rebounders – those struggling financially during COVID-19 but are now back on track.
And then there are the 38% who are careful to spend with little or no change in their financial security.
About 12% of the population feel no change and continue to spend normally without affecting their financial security.
Did you know that 6% of people saved money during COVID-19 and feel more secure financially than before the epidemic?
This report shows that around 82% of respondents were aware of post-pandemic costs. In other words, there has been a shift in their spending habits post-pandemic and to this day. Which group of profiles corresponds to your lifestyle?
So what has changed? How has the economy affected the spending habits of consumers around the world?
What are consumers currently spending on and why?
Even with inflation at historic highs, consumer spending, which accounts for more than two-thirds of US GDP, has remained strong.
In 1957, Milton Friedman argued that “permanent income”, or income likely to be constant, is the primary factor influencing spending choices. Moreover, he argued that buying durable goods like cars was a superior method of converting current expenditures into long-term income streams, which the global economy experienced between 2021 and 2022.
This year’s sloppy performance in consumer spending is happening because households have less money coming in – even though they have more savings. As consumers splurged on furniture and other home-related items during the brief Covid recession and notably spent more time at home due to the outbreak, soaring spending on capital goods boosted demand. This has contributed to the drop in retail trade this year.
Before May, Americans were spending nearly $44 billion less on goods, but on services like housing, utilities, international travel and hospital care, they were spending about $76 billion more. Between February and March 2022, there was an increase in consumption growth as people spent more despite inflation. However, overspending is an ongoing problem in America.
Categories like sportswear, household essentials and appliances were in high demand compared to varieties like gasoline, travel and restaurants, where inflation was more important than demand.
About 80% of consumers I’ve spoken to say they’re concerned about how much they spend every time they shop. Forty-two percent of U.S. consumers have decided to do less sightseeing and shopping during the holidays to cut costs, and about half of that population will shop more online than visit physical stores.
Innovation is now the order of the day, as consumers are now looking for “what is better/more quality” than a brand with a “purpose”.
For example, the Mercedes-Benz Group has made significant investments in digitizing all aspects of its product development, from design and development to manufacturing. As a result, his invention cycles became much shorter, and his ability to customize cars also increased assembly efficiency.
“What has always been the heart of our brand is now also the heart of our strategy: the luxury segment. We are further refining the focus of our business model and product portfolio to maximize Mercedes-Benz’s potential even under difficult conditions. At the heart of this is our goal to build the most desirable cars in the world. Sten Ola Kallenius, Mercedes-Benz Group AG –
How can businesses take advantage of changing consumer habits?
Consumers are now turning to innovative brands that make them feel safe. But, beyond what a brand “promises”, consumers are now concerned about themselves. They now rely on reviews, ratings, social media posts, and recommendations from friends and family to make more buying decisions.
In a study conducted by McKinsey and Company, they found that about 33% of millennial and Gen Z consumers say they choose to buy a brand from a company with similar values to their own, compared to about 12 % of baby boomers.
While this means businesses must align their values and purpose with the needs of their consumers, they must not lose sight of the place of product value, quality, and price.
If there’s one thing the pandemic has taught consumers, it’s that things can change in the blink of an eye.
“Circumstances can change quickly.” — Brian O’Leary, Wealth Advisor and Principal Analyst at Aline Wealth-
It’s also clear that, more than ever, businesses need to stay on top of ever-changing consumer attitudes and behaviors. They need to align their goals with consumer values and make irresistible offers to be able to convert them.
“Good money management has a little to do with your intelligence and a lot to do with your behavior.” -Morgan Housel, The Collaborative Fund-