Consumers are shifting their spending from goods to services

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At Mint Indian Bistro in suburban Las Vegas, owner Kris Parikh’s regulars are back. His second restaurant downtown is once again welcoming tour buses full of visitors from India who crave familiar flavors. And his Las Vegas Strip restaurant, Divine Dosa & Biryani, is benefiting from the return of gamblers to the city’s casinos.

Parikh, 47, still has plenty of headaches, including a shortage of workers and rapidly rising prices for staples like lamb. But having weathered the worst of the coronavirus pandemic, his restaurants are rebounding as pandemic-weary consumers switch from buying goods to spending on services, like dining out.

“Tourists are coming back. We are seeing an increase in traffic. Weekends are busy,” said Parikh. “In April 2020, we had absolutely no business. Are we turning the corner? Absolutely.”

For more than two years, as Americans weathered the pandemic by bingeing on televisions, furniture and home improvements, businesses that relied on face-to-face commerce suffered. Movie theaters went dark. The planes flew empty. Starving restaurants.

Now, consumers are returning to their pre-pandemic habits with the balance between spending on goods and services back to where it was in May 2020, according to inflation-adjusted data from Flexport, a freight forwarder. A separate metric cited by Goldman Sachs shows consumption of goods is about 5 percent higher than the pre-pandemic trend, down from a maximum gap of 15 percent.

“We are only in the early stages of seeing the rotation of consumer spending from goods to services. As time goes by, you will see more of that. Food services are pretty strong. Travel is picking up, airfares and hotel occupancy are picking up,” said Kathy Bostanjcic, Oxford Economics’ chief financial economist for the United States. “The consumer is looking to spend more on services, especially with spring and summer upon us.”

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The shift to services, reflecting consumers’ thirst for a return to their pre-pandemic lifestyles, is welcome 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 cool inflation.

The change is evident throughout the economy. Retail sales in April rose 8.7 percent from a year earlier, according to the Census Bureau’s flash estimate, which does not take inflation into account. But spending at restaurants and bars rose nearly 20 percent.

In March, inflation-adjusted spending on services hit a record $8.6 trillion, surpassing the previous mark set in February 2020, according to the Commerce Department.

Hotelier Marriott said global room demand from leisure travelers in the first quarter was 10 percent higher than 2019 bookings. And Southwest Airlines said its quarterly operating income for the end of June will exceed pre-2019 levels. pandemic. But Target, one of the nation’s largest retailers, was caught off guard in recent weeks when consumer preferences abruptly shifted, leaving it with a mountain of products like appliances and televisions that it was forced to mark down.

“Are we back to normal? No. Will we return to normal? Yes,” said Chris Rogers, chief supply chain economist at Flexport in London.

Since the start of the pandemic, Americans stuck at home have consoled themselves by buying things. Things to use at home. Things to improve the home. Things to use at home.

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

Multiple rounds of federal stimulus spending, and easy money policies from the Federal Reserve, helped support consumption as the economy recovered. Over the past year, as the unemployment rate has steadily fallen, ample job opportunities have fueled continued spending on goods.

Much of what Americans bought came from factories abroad, particularly in China, and they clogged up global supply chains.

By last spring, the collision between surging demand and tight supply was driving prices up. At the Federal Reserve, Chairman Jerome “Jay” Powell said that for most of 2021 supply grunts would be temporary and prices would decline.

Target executives had expected some of the froth in consumer demand to subside this year as stimulus dollars dwindle. But the speed and extent of the change took them by surprise.

The retailer ended up with too many products, especially bulky items like TVs and appliances, and not enough of others. Suddenly items like trendy fashions for people resuming their social lives, as well as sunscreen and cosmetics for travelers, executives told analysts this month.

The company opted to cut prices on surplus goods, which eased its inventory buildup at the expense of quarterly profit.

“Although we anticipate a post-stimulus slowdown…and expect the consumer to continue to refocus their spending from goods to services,” CEO Brian Cornell said. “We didn’t anticipate the magnitude of that change.”

The new consumer mood may be starting to affect supply chains. Truck demand is down by about a third since the beginning of March, although it remains high, according to’s market demand index.

Jason Hilsenbeck, president of Load Match, an equipment clearinghouse in Naperville, Ill., said the drop in demand is hurting new entrants to the short-haul trucking business. More than 2,500 new one- or two-person operations have entered the market since early 2021, hoping to capitalize on soaring cargo demand, he said.

“The small trucking companies that made a killing last year in [the] high-paying spot market are the first non [to] have loads when cargo volumes go down,” he said by email.

The number of imported shipping containers arriving at the Port of Los Angeles has been below last year’s figure for seven straight weeks. On Friday, the backlog of container ships loitering offshore stood at 25, down from a record 109 in January, according to the Marine Exchange of Southern California, a nonprofit organization that tracks vessels entering the main gate. import entry of the country.

Given the time lag between when U.S. companies place import orders and when goods arrive in Southern California, it’s not clear that these changes reflect changing consumer tastes, according to Gene Seroka, director port executive. The products that arrived in Los Angeles this week were ordered three or four months ago, he said.

But Seroka anticipates a decline in import volumes this year. At some point, accelerated purchases of goods exhaust potential demand. Consumers who bought a new refrigerator or remodeled their homes last year will not do so again this year.

“You will see a little bit of a leveling off, maybe a moderation, in imports and then more in the services sector,” he said.

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That exchange rate could contribute to an easing of inflationary supply chain disruptions that the Fed’s Powell said have been “bigger and longer-lasting than anticipated.” (Other factors that could constrain supplies and push up prices are beyond the Fed’s control, including fallout from the war in Ukraine and China’s use of harsh lockdowns to stop the spread of covid.)

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

A shift to higher spending on services could also reshape the demand for labor. During the pandemic, the goods production and transportation sectors have overshadowed services. The rise of e-commerce added nearly 675,000 warehouse workers. Factory employment has almost recovered to its February 2020 level, while employment in industries with direct consumer interaction, such as hotels and restaurants, remains depressed.

Nearly 1.5 million leisure and hospitality jobs that existed in February 2020 have disappeared, according to the BLS.

The Fed is expected to continue raising interest rates by half a percentage point at each of its next two meetings in a bid to curb rising consumer prices. With almost two job openings for every job seeker, there is room to cool down commercial hiring without eliminating existing positions.

“There will be a rebalancing of the demand for workers. But I’m not necessarily looking for big layoffs,” Bostanjcic said.

In fact, the change in consumer preferences has been gradual. Even as consumers change shopping plans today, Target is ordering earlier than usual to ensure it has the right products in stock to meet demand several months from now. This precautionary order, designed to get ahead of congested supply chains, helps keep them congested.

Meanwhile, in Las Vegas, Parikh is waiting for the convention crowds to return. While monthly tourist traffic is about 10 percent below 2019 levels, industry convention attendance is still 40 percent lower than it was three years ago, according to the Las Vegas Convention and Visitors Authority. Vegas.

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

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