Record drop in personal consumption expenditures

One of the leading indicators of economic health – consumer spending – took a historic hit as the COVID-19 pandemic began to unfold in March.

In the 61 years since the Personal Consumption Expenditures report has been issued by the Bureau of Economic Analysis, there has never been a drop as precipitous as the 7.3% decline between February and March of this year. Income levels also fell by about 2% during the month.

“That is a shocking month-to-month decline in PCE,” said John Anderson, head of the agricultural economics and agribusiness department of University of Arkansas System Division of Agriculture and the Dale Bumpers College of Agricultural Food and Life Sciences. As a point of reference, in the 2008-2009 financial crisis, the largest monthly drop in PCE was just under one percent in September 2009. In fact, the 7.3% decline in PCE is the largest monthly decline since the beginning of this data series in 1959.”

The PCE is part of the BEA’s monthly update on personal income and outlays.

Consumerism is the most important component within the economy, accounting for more than two-thirds of all economic activity. The buying of goods and services drives manufacturing and production. It also supports the service sector industries.

Despite the dire drop, not every category was down, however.

“Spending on food was sharply higher in March, up over 19% compared to the prior month,” he said. This spending only includes food bought for home consumption such as grocery and convenience store purchases of food.

“The only surge in PCE on food even remotely comparable to the most recent month was in December 1999, which – as readers of a certain age will recall – coincided with a wave of food stockpiling associated with the Y2K scare,” Anderson said. “In that month, PCE on food increased by 4.8%, month-to-month.”

He noted significant differences between the current COVID-19 pandemic and Y2K.

“First, the Y2K event was anticipated many months in advance. Consumers had ample opportunity to gradually build up supplies of non-perishable food items over a longer period of time than was possible in the current round of panic buying,” he said.

“Second, and more significantly, food service did not shut down in December 1999,” Anderson said. “In the COVID-19 shutdown, consumers were essentially forced to shift almost the entirety of their food purchases to grocery retail.”

It was also noted that spending will likely be further down when the numbers for April are released. Lockdowns around the country only took effect for part of March while every state had some form of a shutdown during the month of April.