The COVID-19 pandemic caused consumers to spend significantly less
year-over-year beginning in March 2020, and that pattern was
remarkably consistent across all regions and demographics in the
United States, according to a study of 12.4 billion consumer credit
and debit transactions. The study, conducted by Argus and believed
to be the largest of its kind, also found that consumer spending
may not fully recover to pre-pandemic levels until early 2023.
To explore the impact of the pandemic on
consumer spending, Argus, a Verisk (NASDAQ: VRSK) business, studied
both credit and debit transactions across the wallets of
approximately 20 million consumers, a representative sample of the
overall credit-card-active population. The study spanned from
January 2019 through December 2020, comparing monthly spend
year-over-year to control for seasonality throughout the year. The
study also evaluated credit and debit transactions of these same
consumers through May 2021 to further understand spend recovery
dynamics.
The COVID-19 pandemic caused consumers to spend
significantly less year-over-year beginning in March 2020, but the
remarkable finding was the consistency of that drop in spend across
the country. The timing of changes to spending levels was the same
regardless of consumer age, risk score, or geographic region. This
was in stark contrast to previous economic downturns, where
spending patterns differed by region and consumer profiles.
Analysis of spending patterns since the 2020 pull-back also
indicates that spending may not fully recover to pre-pandemic
levels until early 2023.
“When the country shut down and so many
retailers, restaurants, and bars closed their doors, consumers
temporarily lost many of their usual spend outlets,” said Linda
Turnbull, Associate Managing Director at Argus. “What is
fascinating is that the timing was so consistent even though new
COVID cases surged in different regions of the country and for
different age groups at different times.”
According to the study, overall consumer
spending dropped on average 16% in March 2020 compared to March
2019. In April 2020, the year-over-year drop was more severe, at
38%. However, in May 2020, a spend recovery was already underway,
with year-over-year spend down a significant but less severe 28%
relative to 2019, a 10-point improvement over April.
“Unlike the 2008 recession, when spend dynamics
differed materially across different local economies, the drop in
spend due to the pandemic had the same timing in every single view
of the data we analyzed, which is unprecedented,” said Turnbull.
“However, the recovery has shown unexpected trends. For example, we
have found that spend among the highest-risk consumers is
recovering fastest. Taken together, these findings have significant
implications for how lenders and policy-makers should develop
strategy.”
Data Show Counterintuitive Patterns for Essential vs.
Non-essential Spend
The study also explored how consumers managed
essential spend versus non-essential spend during the pandemic.
Essential spend included categories like food, medications, gas,
and groceries. Non-essential spend examples included airline
travel, clothing stores, and furniture stores. In all, there were
877 different spend categories classified as either essential or
non-essential. Not surprisingly, both essential spend and
non-essential spend dropped last year. By April 2020, non-essential
spend dropped nearly twice as much year-over-year (47% on average)
as essential spend (down 25%). Both spend types began their
recovery in May 2020, with essential spend recovering significantly
faster than non-essential spend. Across all age and risk tiers,
essential spending had more-or-less fully recovered by the end of
2020. However, non-essential spend has still not recovered for many
segments of the population.
Interestingly, non-essential spend recovery has
been faster for higher-risk consumers, i.e., those with lower
credit scores. This is counterintuitive; the conventional wisdom is
that lower-risk consumers generally have more disposable income and
more available credit with which to spend.
“It came as a surprise to see higher-risk
consumers return faster to pre-pandemic spending levels,” said
Turnbull. “We believe this may be explained in part by the
differences in the type of non-essential spend lower-risk consumers
make versus higher-risk consumers.”
For example, travel spend comprised almost 24%
of pre-pandemic spend for lower-risk consumers, but only 17% of
non-essential spend for higher-risk consumers. Travel has been
slower to recover than other forms of non-essential spend, such as
restaurants and taverns. Another possible driver may be
differences in the number of transactions and the dollar amount of
spend between the two groups.
“Higher-risk consumers generally have less
disposable funds available and so spend less on average on
non-essentials. For example, it’s possible that going out for
dinner even one extra time each month can bring higher-risk
consumers back to their pre-pandemic spending levels. This is less
likely with lower-risk consumers, who spent considerably more—and
more often—on non-essentials pre-pandemic. This is an interesting
open question that we look forward to exploring further,” continued
Turnbull.
Consumer Spend Recovery Analysis Vital
to Understanding the Consumer Condition
The study also explored the spend recovery
dynamic.
“What amazed us was how quickly the recovery
began,” said Lisa Bonalle-Hannan, President of Verisk Financial.
“We were impressed by the speed with which consumers and merchants
alike adjusted to the pandemic environment, with more online
shopping, expanded use of mobile and other contactless payment
methods, and increased convenience options, such as curbside pickup
to enable safer transactions. However, that recovery process is not
complete.”
Argus developed several forecasting models for
non-essential spend to estimate when spend would achieve full
recovery. The more conservative models estimated that spending
among the lowest-risk consumers—those anticipated to be the last to
reach their pre-pandemic spend levels—would not fully recover until
early 2023.
“Forecasting consumer spend is a difficult
challenge, particularly when the environment continues to be
volatile,” Bonalle-Hannan said. “With the delta variant still
surging across the country, the pandemic is far from over. But it
is important to distinguish between recovery from the pandemic and
spend recovery. While the pandemic still impacts our daily lives,
we feel confident that spending is well on its way to full health.
Importantly, our study found that non-essential spend is the key to
total recovery. Therefore, that’s a key indicator we continue to
track closely.”
“This analysis is hugely important to lenders,
policymakers and consumers alike,” concluded Bonalle-Hannan. “The
insights we can provide into how consumers spend and what drives
those behaviors at the individual consumer level, and across the
wallet, are critical for both lenders and policymakers to better
understand the consumer condition in these difficult times. This
study also suggests several ways in which issuers can engage more
effectively with their customers and prospects. With greater
understanding and deeper insights, lenders will be better
positioned to help consumers across the country weather the
unprecedented storm of the COVID pandemic.”
For more information about this Argus study,
please visit argusinformation.com/contact.
About Verisk Financial Argus
Argus, a Verisk (NASDAQ: VRSK) business, is a
leading provider of intelligence, decision support solutions, and
advisory services to financial institutions across the global
commerce ecosystem. Our clients include more than 50 top US,
Canadian, and other international financial organizations,
regulators, payment providers, merchants, and media. Argus is the
leading source of segment-level portfolio management benchmarking
data, analytics, models, and advisory services. We maximize value
delivery to clients by combining proprietary data sets,
cutting-edge software and analytic tools, domain expertise, and our
unique results-oriented approach. Customers worldwide use our
services for tailored data management solutions that include
business intelligence platforms, profile views, mobile data
solutions, enterprise database services, and fraud risk scoring
algorithms for marketing, fraud, and risk mitigation. To learn
more, visit argusinformation.com.
- Graph: YoY % Change in $ Spend, by Risk
Kevin Sugarman
GlobalFluency
408.677.5311
ksugarman@globalfluency.com
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