Consumers are shifting their spending from goods to services

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At the Mint Indian Bistro in suburban Las Vegas, owner Kris Parikh reunited with his regulars. His second downtown restaurant is once again welcoming tour buses full of Indian visitors in search of familiar flavors. And his restaurant on the Vegas Strip, Divine Dosa & Biryani, is benefiting from the return of gamblers to casinos.

Parikh, 47, still has a lot of headaches, including a labor shortage and rising prices for staples like lamb. But after weathering the worst of the coronavirus pandemic, its restaurants are rebounding, as weary consumers shift from buying goods to spending on services, like dining out.

“Tourists are coming back. We are seeing an increase in traffic. Weekends are busy,” Parikh said. “In April 2020, we had absolutely nothing to do. Are we turning the corner? Absolutely.”

For more than two years, as Americans weathered the pandemic by gorging themselves on TVs, furniture and home projects, businesses that relied on face-to-face commerce suffered. Movie theaters are shut down. The planes were flying empty. The restaurants are starving.

Now consumers are returning to their previous habits, with the balance between spending on goods and services returning to its May 2020 level, according to inflation-adjusted data from Flexport, a freight forwarder. A separate metric cited by Goldman Sachs shows that consumption of goods is about 5% higher than before the pandemic, down from a maximum deviation of 15%.

“We are only in the early stages of rotating consumer spending from goods to services. Over time, you will see more. Restaurant services are quite solid. Travel is rising, airfares and hotel occupancy,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics. “The consumer is shifting more toward service spending, especially with spring and summer upon us.”

The shift towards services, reflecting consumers thirsty to resume their previous lifestyles, is good news and not just for business owners like Parikh. It could also ease pressure on stressed supply chains and help the Federal Reserve in its campaign to calm inflation.

The change is evident throughout the economy. Retail sales in April rose 8% from a year earlier, according to the Commerce Department’s preliminary estimate, which does not take inflation into account. But spending at restaurants and bars jumped nearly 20%. In March, inflation-adjusted spending on services hit a record $8.6 trillion, surpassing the previous mark set in February 2020.

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Hotelier Marriott said global demand for rooms from leisure travelers in the first quarter was 10% higher than bookings in 2019. And Southwest Airlines said its quarterly operating revenue by the end of June would reach levels before the pandemic.

But Target, one of the nation’s biggest retailers, has been caught off guard in recent weeks as consumer preferences have shifted sharply, leaving it with a mountain of products like appliances and televisions that it has been forced to reduce.

“Are we back to normal? No. Are we going back to normal? Yes,” said Chris Rogers, senior supply chain economist for Flexport in London.

From the start of the pandemic, Americans trapped at home took comfort in buying things. Things to use at home. Things to improve the house. Things to wear at home.

This boom in goods and slump in services has reversed the usual pattern of consumer behavior during a recession. Difficult times usually cause people to put off buying big-ticket items. But instead, with millions of Americans working from home, dry cleaners and hotels suffered as online orders soared.

Several rounds of federal stimulus, combined with the central bank’s easy money policies, helped support consumption as the economy recovered. Over the past year, as the unemployment rate has steadily declined, ample job opportunities have fueled continued spending on assets.

Much of what Americans bought came from factories overseas, particularly in China, and clogged global supply chains. Last spring, the collision between growing demand and tight supply pushed prices up. At the Federal Reserve, Chairman Jerome H. Powell has said for most of 2021 that supply rumbles will prove temporary and prices will decline.

This does not happen. Target executives expected some of the scum from consumer demand to decline this year as stimulus dollars dwindle. But the speed and scale of the change caught them off guard.

The retailer ended up with too many of some products, especially large items like TVs and appliances, and not enough of others. Items like trendy fashion for people resuming their social lives, as well as sunscreen and cosmetics for travelers, have suddenly been in vogue, executives told analysts this month.

The company opted to cut prices on excess goods, which reduced its inventory backlog at the expense of quarterly profits. “While we anticipate a post-stimulus slowdown” and “expect the consumer to continue to refocus spending on goods and services,” Chief Executive Brian Cornell said, “we did not anticipate the magnitude of this change.

The new consumer mood may be starting to affect supply chains. Trucking demand has fallen by about a third since the start of March, although it remains high, according to the Market Demand Index on

Jason Hilsenbeck, president of Load Match, an equipment clearing house in Illinois, said the drop in demand is hitting new entrants into the short-haul trucking business. More than 2,500 new one-to-two-person operations have entered the market since the start of 2021, hoping to capitalize on high freight demand, he said.

“Small trucking companies that wreaked havoc in the high-paying spot market last year are the first to go without loads when freight volumes decline,” he said in an email.

The number of imported shipping containers reaching the Port of Los Angeles has been below last year’s figure for seven consecutive weeks. On Friday, the backlog of container ships loitering offshore was 25, down from a record 109 in January, according to the Marine Exchange of Southern California, which tracks vessels entering the country’s main import gateway.

Given the lag between when U.S. companies place import orders and when goods arrive in Southern California, it’s unclear whether these changes reflect changing consumer tastes, says Gene Seroka. , executive director of the port. The goods arriving in Los Angeles this week were ordered three to four months ago, he said.

But Seroka predicts lower import volumes this year. At some point, accelerated purchases of goods exhaust potential demand. Consumers who bought a new refrigerator or remodeled their home last year will no longer do so this year. “You’ll see a bit of a leveling, maybe a slowdown, in imports and then more in the services sector,” he said.

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This kind of change could help mitigate inflationary supply chain disruptions that Powell says have been “bigger and longer lasting than expected.” Other factors that could restrict supply and drive up prices are beyond the central bank’s control, including the fallout from war in Ukraine and tough lockdowns in China to halt the spread of the coronavirus.

Over the past year, the prices of durable goods rose 14% while the cost of services rose 5.4%, according to the Bureau of Labor Statistics.

A move towards higher spending on services could also reshape labor demand. During the pandemic, the sectors producing and transporting goods have eclipsed services. The rise of online retailing has added nearly 675,000 warehouse workers. Factory employment has roughly recovered to February 2020 levels, while employment in industries with direct consumer interaction, such as hotels and restaurants, remains depressed.

Nearly 1.5 million recreation and hospitality jobs that existed in February 2020 have disappeared, according to the Bureau of Labor Statistics. The Federal Reserve should continue to raise interest rates by half a point at each of its next two meetings in order to slow the rise in consumer prices. With nearly two job openings for each applicant, there is an opportunity to cool corporate hiring without cutting existing positions.

“There will be a rebalancing of the demand for workers. But I’m not necessarily looking for big layoffs,” Bostjancic said. Indeed, the evolution of consumer preferences has been gradual.

Even as consumers change their shopping plans, Target is ordering earlier than usual to ensure it has the right products in stock to meet demand several months from now. These precautionary orders, designed to stay ahead of congested supply chains, are helping to keep them congested.

In Las Vegas, meanwhile, Parikh awaits the return of the convention crowds. While monthly tourist traffic is about 10% below 2019 levels, industry convention attendance remains more than 40% lower than three years ago, according to the Las Vegas Convention and Visitors. Authority.

“We want that convention traffic back,” said Parikh, who expects to break even this year before returning to profitability in 2023.


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