How Covid Turbocharged the American Consumer

Stimulus programs drove up spending by Black, Hispanic and low-income families. Now inflation is threatening to derail those fragile gains.

Spending by U.S. consumers in major cities is up more than 15% compared to two years ago, fueling a rapid economic recovery that remains on fragile footing heading into next year.

The unprecedented boom in online shopping was driven in part by pandemic government aid, according to a Bloomberg News analysis of anonymized transaction data from Affinity Solutions, Inc. that includes credit and debit cards for 10.6 million people. The data show how rounds of stimulus programs helped drive up spending by Black, Hispanic and low-income households by a much faster rate than the overall average.

Yet this rebound may already be slowing for families that benefited the most. The effects from pandemic help are waning and inflation is flaring, eating into households’ budgets. November inflation surged to 6.8%, the fastest annual gain since 1982, according to government data released Friday. The persistent inflation has become a headache for the Biden White House and Fed policymakers, threatening to undermine the engine of the economic recovery.

For those Americans who found breathing room from debt obligations during the past 18 months, bills come due next year. But for now Affinity data show a resilient consumer in the face of rising prices and pent-up demand among the wealthiest.

Affinity tracks more than 100 million credit and debit cards nationwide. This analysis, focusing on more than a dozen major metro areas, sheds light on pandemic patterns that have reshaped the economy.

Among the habits consumers have formed: buying more books and home-improvement tools. Amazon.com Inc., Costco Wholesale Corp. and lower-cost mass retailers like Walmart Inc. emerged as clear winners.

The Stimulus Worked (At Least For a While)

Three rounds of federal stimulus checks boosted overall spending more than 25% above 2019 levels by the summer. By October, even after the expiration of federal unemployment benefits, spending was still up 15.3% above pre-pandemic levels.

The Inflation Impact

Inflation has taken center stage, in both policymakers’ and consumers’ worries, with the two-year rate reaching more than 7.5% in October, compared to 2019 price levels. Yet, that’s only half the spending increase seen in Affinity’s data, indicating that greater consumer demand—and economic growth—is playing a role.

Note: Two-year inflation is calculated using seasonally adjusted values.

Black Spending Surged the Most

Black and Hispanic card users increased spending faster than White and Asian consumers. This lines up with research from the JPMorgan Chase Institute, which showed stimulus checks and unemployment benefits padding out bank account balances for Black and Hispanic families, while White families—who started with higher balances—cut their spending more in the early months of the pandemic.

Note: Race and ethnicity data is available for 4.4 million card users tracked.

Wealthy Spenders Pulled Back the Most

Spending by those making $35,000 a year or less and between $35,000 to $80,000 was back to 2019 levels by May 2020, but it took until September for those earning more than $80,000. According to research from the New York Fed, the less well-off were more likely to use stimulus checks on consumption and paying down debt, while wealthier Americans saved and cut discretionary spending.

Note: Income data is available for 4.8 million card users tracked.

October 2021 spending per capita by group

White

$717

Asian

$516

Hispanic

$485

Black

$445

October 2021 spending per capita by group

White

$717

Asian

$516

Hispanic

$485

Black

$445

Fiscal transfers during the pandemic meaningfully boosted spending power for Black families, said Fiona Greig, managing director and co-president at the JPMorgan Chase Institute.

“By virtue of the racial wealth gap that we know exists, they had more room to grow in their spending capacity,” she said.

This untapped consumer market—also evident in the greater spending increases among Hispanic and low- to middle-income people—suggests that closing the income and wealth gaps may be beneficial for equality as well as supporting long-term economic growth.

While White, Asian and wealthier Americans have been able to call on their more generous credit lines at various times throughout the pandemic, many minority and lower-income people remain largely reliant on what’s in their checking accounts. With a lot of their temporary government inflows now spent, according to Greig’s report, any future spending growth by these groups will depend on greater labor-market and wage gains.

Debit or Credit?

Relative debit card usage spiked as federal stimulus checks landed in bank accounts, particularly for Black and lower-income people.

Payment card type: Credit

Debit

Asian

Hispanic

White

Black

100%

75

50

25

0

2019

2020

2021

Income:

Less than $35K

$35K–$80K

More than $80K

100%

75

50

25

0

2019

2020

2021

Payment card type: Credit

Debit

Asian

Black

White

Hispanic

100%

75

50

25

0

’19

’20

’21

Income:

$0–$35K

35–$80K

$80K+

100%

75

50

25

0

’19

’20

’21

Payment card type: Credit

Debit

Asian

Black

100%

75

50

25

0

2019

2020

2021

Hispanic

White

100%

75

50

25

0

2019

2020

2021

Income:

Less than $35K

$35K–$80K

100%

75

50

25

0

2019

2020

2021

More than $80K

100%

75

50

25

0

2019

2020

2021

In the meantime, consumption will likely shift from goods to services, with spending relying on pent-up savings among wealthy households, which tend to spend more on services, said Andrew Dubinsky, an economist at UBS Group AG.

“As virus-related disruptions fade, you get much more services spending from these wealthy households,” he said.

The Affinity data used in this analysis includes more than $180 billion spent on debit or credit cards across more than 600 categories—though not on large housing items like rent or mortgage payments.

The Venmo Economy

Increased use of the Venmo mobile payment app made money transfers the single fastest-growing spending category. Alongside people splitting purchases with, or sending much-needed financial help to, friends or family, this may reflect a greater acceptance of such payment methods by merchants or even the app’s pivot into cryptocurrencies amid the recent boom.

Staples Are More Expensive

Inflation is particularly steep for the type of spending that most people simply can’t avoid, like at supermarkets and gas stations. In October, prices for food meant for home consumption were up 9.6% compared to 2019, while the cost of gasoline was up 22.7%.

Note: Two-year inflation is calculated using seasonally adjusted values.

Dining and Leisure Bounce Back

Restaurants were one of the most visible industries hurt by the pandemic early on, but PPP loans and creative policies—such as sidewalk dining—have resulted in the biggest spending increase in dollar terms of any category tracked. Meanwhile, hotels and recreation are just now getting back to pre-pandemic levels, with travel spending still trailing.

Note: Sub-categories are aggregated together to create these four spending buckets.

Pandemic Habits That Stuck

The shift to a more stay-at-home lifestyle has helped some categories hold onto a larger share of consumers’ monthly budgets. This includes books and Internet-related services, both dominated by spending on Amazon, home improvement supplies, wholesale clubs and discount shopping at the likes of Walmart, Target and Dollar General.

Where Spending Is Still Lower

While overall spending has surged, several categories have yet to recover fully, such as colleges (faced with falling enrollments), beauty and barber shops, and in recent months, phone bills and pharmacies.

While many of the above trends can be tied to people spending more time at home and the slow return to office, the still red-hot housing market is a major influence as well. Besides a continued emphasis on home-improvement chains like Home Depot Inc. and Lowe’s Cos., there’s been sustained spending increases on both realtors and furniture stores.

“If there’s that feeling of rising inflation and losing value, doing up your home is a way to store value,” said Fiona Cincotta, senior financial markets analyst at City Index.

But supply chain snarls are leading to empty shelves and long waiting times, threatening to leave a lot of the existing demand unmet.

October 2021 spending per capita by income group

More than $80K

$695

$35K–$80K

$504

Less than $35K

$413

October 2021 spending per capita by income group

More than $80K

$695

$35K–$80K

$504

Less than

$35K

$413

“The real linchpin to the story right now is not demand, it’s supply and whether we can actually get the goods that need to be sold,” said Jaime Katz, senior equity analyst for Morningstar. “It’s going to be hard to grow on top of the Covid-related demand.”

Looking at some of the larger spending categories shows how some demographic and income groups have redirected spending—eating out has overtaken groceries for Black, Hispanic and Asian people, while White and middle-income households are fuelling up their cars and stocking up their libraries more.

Pandemic Purchases

Categories with longer arrows had more spending growth since October 2019.

Asian

Black

Hispanic

White

$35K–$80K

Less than $35K

More than $80K

Bookstores

Gas

Grocery Stores & Supermarkets

Restaurants & Bars

Spending

per capita

 

$80

60

40

20

0

Asian

Black

Hispanic

White

Less than $35K

$35K–$80K

More than $80K

Bookstores

Gas

Grocery Stores & Supermarkets

Restaurants & Bars

Spending

per capita

 

$80

60

40

20

0

Asian

Black

Hispanic

White

Less than $35K

$35K–$80K

More than $80K

Spending per capita

0

20

40

60

$80

Bookstores

Gas

Grocery Stores & Supermarkets

Restaurants & Bars

Note: Spending per capita is the overall spending for each group divided by the group’s total number of cardholders in the Affinity sample, regardless if they had card transactions in a given month.

Geographically, the spending recovery, like the jobs recovery, is also playing out at different speeds.

A recent research paper from the Federal Reserve Bank of Boston, which also looked at Affinity data, found that state-level containment policies such as mobility restrictions had a large effect on consumption spending at the start of the pandemic but a small effect later on.

Where Spending Is Up the Most

Sun Belt cities like Atlanta and Albuquerque, New Mexico, have benefited from relatively lower unemployment rates as well as consumer spending that’s up double-digits compared to 2019 levels. Meanwhile, Honolulu has faced a recent uptick in tourism as well as some of the highest living costs in the country.

Where Spending Is Up the Least

The West Coast is home to several cities—Los Angeles, San Francisco and San Jose, California—where spending cratered the deepest in the early months of the pandemic, likely spurred by California’s sweeping lockdowns—and has recovered slowest. Relatively high unemployment in Las Vegas, which is still awaiting the return of the convention business, is likely tamping down consumption.

Consumer spending recovered quickly in Atlanta thanks in part to a surge in its labor force, said Chris Chmura, chief executive of consulting firm Chmura Economics and Analytics.

One reason spending lagged in high-tech centers like San Francisco is that many of their jobs can be done from home.

“The logic there is if you’re working from home, you’re not spending money driving to work and you’re not spending money on the local shops,’’ she said.

While inflation is hitting cities differently, it’s hard to predict how and where it will hit spending, said Michael Skordeles, an economist at Truist Financial Corp. in Atlanta. Were it limited just to gasoline or a couple items in the grocery store, people could change their buying habits. With prices up everywhere, no city is immune, he said.

“We’re inelastic,” Skordeles said. “We can’t just choose to cut back when the inflation is so pervasive.”

Looking ahead, wealthier Americans have yet to really unleash their spending power, which is likely to boost services and travel. It’s at least some good news for the economy, but will further widen existing inequalities.