featured graphic for the Federal Reserve Bank of St. Louis

What funded the increase in real personal consumption expenditures during COVID-19?

Here is a fascinating graphic published by the St. Louis Federal Reserve’s FRED blog:

Graphic courtesy of the St. Louis Federal Reserve.
Graphic courtesy of the St. Louis Federal Reserve.

(The original graphic at the FRED blog is interactive. The graphic above is just a screenshot.)

The gray bar at the left indicates the recession triggered by government response to the COVID-19 pandemic.

The brightly colored lines show different portions of real personal consumption expenditures starting in February 2020, just prior to the government response. All the expenditures are indexed to their respective value as of February 2020, which is set to 100 (the dashed line). That indexing makes it easy to see what happened over the next two years.

Durable goods: these are tangible items that are used more than once and are generally thought to last at least three years. Think of home appliances or sporting goods. They are represented by the purple line in the graph above.

Nondurable goods: these are tangible items that are used up over a relatively short period of time, generally limited to three years. Think of food, office supplies, or newspapers. They are represented on the graph by the green line.

Services: these are non-physical, non-tangible such as banking, education, medical treatment, entertainment, dining, and transportation. Services are represented by the red line in the graph above.

What the graph shows

The graph clearly shows that the purchase of both services and durable goods tanked immediately.

In contrast, everybody was out buying all the toilet paper and cleaning supplies that they could lay their hands on, so purchases of nondurable goods popped — at first. Purchases fell once everyone had closets full of hand sanitizer and paper towels, or there were no more to be had.

Astonishingly, within a couple of months everyone in lockdown was ordering durable goods for delivery to their doorstep. Nondurable goods recovered from their brief dive. Both categories of goods remain well above the pre-pandemic level of February 2020. Anybody with cash (or credit) was a big spender on goods over the last two years.

Services — which bore the brunt of government restrictions over the last two years — have only just clawed their way back to pre-pandemic levels. Think of closed restaurants and movie theaters, theme parks and sports arenas that are still operating under government masking and social-distancing restrictions.

Dominic Pino at National Review Online uses this graph to discuss the supply chain snarl: “That’s how you get congestion in supply chains. Nobody expected or was prepared for the deluge in goods that resulted immediately after the pandemic recession ended in May 2020.”

What the graph doesn’t show

The graph doesn’t explain where the money came from to pay for all those durable and nondurable goods, especially when a big chunk of the working population was out-of-work.

Some people worked and continue to work — essential workers in health care and emergency services, for instance, and office workers who could work from home, and all those delivery drivers leaving packages on doorsteps.

Some people applied for and received state and federal unemployment benefits.

Probably some people maxed out their credit cards, or took out second mortgages.

Calculated Risk published another fascinating graph, this one comparing job losses and recovery over time for recessions after World War II:

Job loss due to recessions after World War II. Graph courtesy of Calculated Risk.
Job loss due to recessions after World War II. Graph courtesy of Calculated Risk.

Our current situation and recent history is illustrated by the bright red line. Anyone who doesn’t gulp at the bungee jumping of pandemic job loss can’t be easily scared.

Note that although unemployment nationwide is now at only 3.9%, the economy still supports about 3.6 million fewer jobs than before the pandemic. That implies that a lot of people dropped out of the workforce.

So my question remains: what funded the eye-popping sustained rise in the level of personal consumption expenditures over the last two years?

Is this level of personal consumption expenditures sustainable? What happens if expenditures sag?

Would the level of personal consumption expenditures be even higher if the supply chain tangles get smoothed out?

Will personal consumption expenditures for goods as compared to services return to its pre-pandemic relationship?

Is heightened demand for durable and nondurable goods feeding inflation? How much of this demand is discretionary? How high must prices go to stifle demand?

So many questions, so few answers.