The switch back from goods to services that wasn’t


Early in the pandemic, there was hope that humanity might draw a lesson or two from our renewed sense of fragility. Existential threats like global warming would be taken more seriously, supply chains rejigged, healthcare services strengthened and critical workers held in higher esteem.

So far, however, the biggest change has been in what we buy. Data from US freight-forwarder Flexport show how US consumers are still spending far more on goods relative to services than they used to.

Pre-pandemic, Americans spent roughly 36 per cent of their incomes on goods, says Chris Rogers, Flexport’s supply chain economist. In early 2021, with millions confined to their homes, that figure jumped to around 42 per cent. Cue pandemonium at many of the world’s biggest ports.

The post-Covid Indicator compares the balance of spending in summer 2020 (PCI = 100) to that before the pandemic (PCI = zero) © Flexport, US Bureau of Economic Affairs

The jump in demand for “stuff” over “experiences” is neatly illustrated by the green line in the chart above, which tracks spending habits measured by the US Department for Commerce. The latest data from March indicate levels of personal consumption expenditure have stayed broadly stable so far this year.

The red line, meanwhile, represents a “peek into the future” based on an amalgamation of that same national consumption behaviour and the latest data on which goods are leaving ports in Asia.

Going off past correlations, Flexport estimates that consumers’ preferences for goods versus services today, in May — in aggregate and in dollar terms — remains pretty elevated, belying expectations that a “post-Covid” reopening of the economy would see spending patterns snap back to normal.

The chart below distinguishes between the different types of goods being bought.

© Flexport, US Bureau of Economic Affairs

The solid lines show how consumers’ nominal preference for goods over services was more pronounced for durable goods (furniture, exercise equipment, consumer electricals) than for non-durable goods (food, clothes) in the first months of 2021. Preferences for both look set to remain above summer 2020 levels into the second quarter of this year.

The inflation-adjusted dotted lines tell a different story. In real terms, Americans’ preferences for non-durable goods relative to services has plummeted since November, reflecting how prices for food and clothes (which are linked to global commodity prices), have so far risen quicker than prices for services.

Does that suggest that supply chain bottlenecks may be about to ease? Not really, according to Rogers. Since T-shirts are easier to ship than fridges, “for long haul freight, the decline in non-durables isn’t as important as if durables were falling”. Lockdowns across China aren’t helping either.

The fact that demand for goods has yet to fall back to the pre-pandemic trendline has implications for the trajectory of global inflation, Rogers adds.

If inflation is driven by elevated demand facing up to at best fixed supply, unless and until demand comes down significantly, it’s going to put pressure on those supply chain networks . . . We’re nowhere near that yet.

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