Ryan Hanna Senior Vice President, Senior Portfolio Manager & Director of Equities
Changing Consumer Behaviors During the COVID-related lockdowns that began in March across the country, an interesting thing happened: consumer spending habits changed. While these trends may prove more transitory, consumers have spent their dollars on different things during this pandemic. Up until earlier this year, consumers preferred experiences over buying physical goods. Both old and young, people were traveling more, spending evenings out to dinner with friends, going to concerts and sporting events, or seeing shows on Broadway. The forced shutdown of the US economy shuttered the “experience” economy and consumers redirected spending to other areas. We were forced to forego that summer vacation, miss that concert, cook inside our homes instead of going to a restaurant, and our spending dollars were quickly reallocated from “experiences” back to “things”.
As the pandemic raged forward, many people, now forced to work remotely, and remain isolated in their homes and apartments, decided to spruce up their living spaces. That home project that had been delayed and postponed repeatedly was now getting completed. A fresh coat of paint, a new rug, décor, and furniture was purchased. If we were going to remain cooped up inside our homes, we also needed a more conducive environment to work. Let us not forget the kids; as many children face the task of learning remotely this fall, parents bought desks, laptops, and updated their home workspaces for both parents and kids to remain at home this fall.
Here are three examples that highlight the trends:
Home Depot: Same-store-sales, a measure of revenue comparability from existing stores versus an earlier period, grew 23.4% in the second quarter. The previous 5 quarterly same-store-sales were 2.5%, 3%, 3.6%, 5.2% and 6.4%.
Lowes: same-store-sales increased 34.2% during the second quarter. The previous five quarterly same-store-sales were 3.2%, 2.3%, 2.2%, 2.5%, and 11.2%.
Wayfair: in the second quarter, revenue grew 83% to $4.3 billion. This compares to revenue of $2.3b in the 2nd quarter of 2019.
While this is a small sample size, to say that these companies benefitted from consumers investing in their homes would be an understatement. It is unrealistic to assume that sales growth will remain this strong into the future, however, during the second quarter, people spent 5x-10x more than normal on home improvement.
Retail Sales Surprisingly Resilient
Considering the ongoing limitations on travel, the indoor dining restrictions, and other capacity limitations across the broader United States, consumer spending has been quite resilient. In fact, people seem to be spending just as much as they did prior to the pandemic. As mentioned earlier, they just seem to be spending in different areas. Despite a stubbornly high (but improving) unemployment rate and a growing number of permanent job loses across the country, people are still spending.
In August, the US Census Bureau released July retail sales data. Estimates of US retail and food services for July 2020 (adjusted for seasonal variations) were $536 billion, an increase of 1.2% sequentially from June and 2.7% higher than last July (2019). Total sales for the period of May through July 2020 declined only 0.2%. Not surprising, non-store sales (think ecommerce/Amazon) increased 24.7% from the July 2019 period, while food and beverage stores increased 11.1%.
It is likely that the additional government support provided to the unemployed, families and small businesses through the Coronavirus Aid, Relief, and Economic Security (CARES) Act (benefits that have now lapsed) did in fact help support consumers during the worse of the pandemic-related lockdowns and contributed to the strong consumer sales figures this summer. The total package was estimated to be in excess of $2 trillion dollars. It is also worth noting that the savings rate has ballooned during the past six months and remains elevated.
U.S. Personal Savings, Seasonally Adjusted, July 31, 2020
Dating back to the early 1980’s, 30-year US government treasury bonds were yielding over 15%. Today, that same 30-year treasury bond is yielding only 1.4%. Accordingly, the trend in mortgage rates has followed suit, and today, the average 30-year mortgage rate is roughly 3%. Many consumers have taken advantage of low interest rates to refinance mortgages at record low levels, in turn, lowering monthly payments and improving cash flow.
While some borrowers have taken advantage of low interest rates to refinance mortgages and lower monthly payments, others have struggled to even make the required monthly payments. According to data from the Mortgage Bankers Association (MBA), the delinquency rate for mortgage loans on one-to-four unit residential properties increased to a rate of 8.22% of all outstanding mortgage loans. This represents an increase of 3.86 percentage points from the first quarter of 2020 and was the biggest quarterly rise in the history of the MBA’s survey. Not surprisingly, delinquencies track closely with the availability of jobs, and the states with the largest quarterly increase in delinquency rates were ones with a significant exposure to leisure and hospitality jobs, like New York, Florida, and Nevada. While the 30-day delinquency rates have dropped in the second quarter, those with 60-day and 90+-day rates have climbed to the highest levels since 2010. To sustain and continue to build on the current economic momentum we have seen in consumer spending trends, and to avoid more disastrous economic outcomes in housing, more progress is needed to lower the number of unemployed and additional stimulus measures are likely to be required.
Despite the resiliency of consumer spending through the summer, especially in many home-related categories, areas of vulnerability and weakness remain across the broader economy. Following the July 31 expiration of the extra unemployment benefits, the next few months will be especially critical and trends around home mortgage forbearance and delinquencies will be vitally important to monitor. To be fair, it is not just homeowners; US banks are growing more concerned about loans secured against commercial properties, like offices, malls and hotels, as well. Some small and large businesses remain challenged, especially in the foodservice, travel and leisure industries, and if many of these service-oriented jobs are lost for a sustained period of time, how will that impact our economy and its recovery?
The next few months will likely bring with it a period of heightened volatility surrounding the election, especially with an outcome that many believe could be contested or delayed given the number of mail-in ballots expected. Despite the strong stock market performance to date, aided by monetary and fiscal stimulus, investors should take note that risks are elevated and likely will remain that way through the end of the year. “Mortgage Delinquencies Spike in the Second Quarter of 2020”, Mortgage Bankers Association, August 17, 2020
U.S. Department of Commerce, U.S. Census Bureau, Advanced Monthly Sales for Retail and Food Services, July 2020
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