As the second vaccine shot went into my arm, I could almost taste the instant gratification of deferred desires. Having done without for nearly a year, it was time to indulge.
While I was lucky enough—actually, old enough—to be included in the first wave of inoculations, the rest of America is about to follow. The possibility that broader vaccine distribution will lead to “herd immunity” by the end of 2021 is no longer fanciful. And with the end of the COVID-19 nightmare, goes the argument widely discounted in financial markets, long-deprived US consumers can finally relax and enjoy the glorious V-shaped recovery.
If only. The concept of pent-up demand is well studied in economics. While it typically applies to the consumption of durable goods—cars, furniture, appliances, and the like—it has also been used to describe residential construction activity and business investment in plants and equipment.
The idea rests on a basic premise of dynamic demand models known as the “stock-adjustment” effect: an unexpected development that prompts a deferral of spending on long-lasting items with a finite lifetime does not mitigate obsolescence (physical or technological) and the associated need for replacement. It follows that once the interruption ends, a surge of postponed, or pent-up, replacement demand can spark economic recovery.
Typically, the bigger the shock and the associated deferral of replacement demand, the stronger the rebound. I tell my students to imagine a big rubber band: the more you pull it, the greater the snapback when you release it.
This works well in explaining the temporary impact of what economists call exogenous shocks like natural disasters, strikes, political upheavals, and wars. It works less well for shocks that can cause lasting economic scarring—like financial crises and, yes, pandemics.
Recent trends in US consumer spending suggest that the natural forces of pent-up demand may largely be spent. Over the final eight months of 2020, the post-lockdown rebound of durables consumption was fully 39% greater than what was lost during the lockdown in March and April. As a result, durables consumption rose to 8.25% of GDP in the second half of 2020—the highest share since early 2007 and well in excess of the 7.1% average over the 2008-19 period.
There is probably some more to come. On the heels of another tranche of federal relief checks issued in December ($600 per eligible recipient), the 5.3% surge in retail sales reported for January—dominated by outsize gains for durable items such as electronics, appliances, and furniture—provides further evidence of consumer euphoria. And with an even larger round of $1,400 checks in the offing as President Joe Biden’s “American Rescue Plan” takes hold, additional impetus from consumer durables seems likely.
At that point, however, pent-up demand should be exhausted. This is even more apparent when assessing the extraordinary power of the recent surge in consumer durables relative to pent-up demand cycles in the past.
Since the early 1990s, recoveries in personal consumption have been relatively muted. But in the seven cyclical expansions from the mid-1950s through the early 1980s, the release of pent-up demand boosted consumer durables’ share of GDP by 0.6 percentage points, on average, in the four quarters following business cycle troughs. From this perspective, the recent increase in consumer durables’ share of GDP of fully 1.35 percentage points from the 6.9% low hit in the first quarter of 2020 is all the more extraordinary. At more than double the earlier cyclical norm, it is all the more unsustainable.