US services have better China lockdown defenses

NEW YORK (Reuters) - New lockdowns in the Chinese manufacturing hub of Shenzhen presage more supply disruptions for companies like Apple and higher prices for consumers.

Past snafus are one of the reasons that US inflation has surged to a four-decade high of nearly 8%. As items from electronics to cars become ever more expensive, or even unavailable, households will revert to pre-pandemic habits and focus their non-essential spending on services like restaurants and travel.

In the past two years, cooped-up Americans bought more stuff. For example, spending on durable goods rose 14% in the fourth quarter of 2020 compared with a year earlier, according to the US Bureau of Economic Analysis. But spending on services fell 5% over this period. In normal times, services account for about 70% of consumer expenditure so this drop meant more money was squirreled away, especially by wealthier households. Consumers accumulated about $2.6 trillion of excess savings during the pandemic, Moody’s Analytics estimates, with more than 70% of that held by the top fifth of the income distribution.

Consumer spending on both goods and services has increased in the past few quarters. Yet rising costs, particularly for food and energy, will lead to a rebalancing. Consumer prices rose 7.9% in the 12 months to February, according to the Labor Department. Meanwhile, services excluding those related to energy rose by a less eye-popping 4.4%. That will make eating out or booking holidays appear relatively more affordable to those who have money left over after paying for basics.

The spending patterns of richer households also favour companies like Hilton Worldwide and Expedia. The top 20% of households by income spent four times as much on travel as middle-income households, and eight times as much as the poorest, according to a Bureau of Labor Statistics report in 2010. High inflation may accentuate this further, as rising fuel and food costs eat up a bigger chunk of disposable income among the middle and working class. The well-off, who accumulated most of the $2.6 trillion of excess savings during the pandemic, will, however, be able to keep splurging.

An inflation-induced hit to US consumption is bad news for all companies. But those in the service sector, which were worst affected by pandemic lockdowns, will better weather this new storm.