COVID-19’s Impact on Consumer Confidence and Effect on the Economy
Consumer confidence has been on a waterfall decline: dropping by a precarious 30% over the past 10 weeks, according to a survey of 6,000 U.S. consumers by Morning Consult Index of Consumer Sentiment.
For the rest of the year, GDP is expected to slow down by 30% to 40%. Daily consumer confidence is also often used as a proxy for business optimism, and provides a window into how businesses are feeling as well as how consumers are reacting to all the stimulus that, hopefully, is reaching them. Overall US business confidence will obviously plunge, as small businesses comprise nearly half of all employment and waves of small business closures are expected. One analysis highlights that a gut-wrenching 45% of all hourly employees have either already filed or plan to file for unemployment. In general, since the last expansion cycle (when markets recovered after the ’08 crisis), e-commerce and price competitiveness have made small businesses lose share of their overall contribution to GDP. By Q3 or Q4 of this year when the economy is hopefully in full-swing recovery mode, we can anticipate that small businesses are poised to feel more downward pressure, as companies that support data centers, software businesses, cloud, digital payments, and e-commerce businesses will become more competitive as they are insulated from the downturn. Other industries, notably the travel industry and high-end retailers, are in the midst of a compression shock, as noticed with domestic flights less than 10% full because of the COVID-19 outbreak and J. Crew and Neiman Marcus filing for Chapter 11 bankruptcy.
Millennials’ financial habits will change as a result of COVID-19
We can expect, in ways still unpredictable, that millennials’ financial choices, risk appetites, and savings habits will change as a result of COVID-19. Millennials dominate approximately half of the American workforce in 2020 and 75% of the global workforce by 2025; therefore, the financial habits of this burgeoning group will influence the course of the financial recovery of the economy, post-COVID-19. Leading up to the coronavirus pandemic, millennials are overloaded with student debt, heightened suspicions of job security, credit card debt, and low savings rates. Homeownership rates among millennials (born 1980–1996) continues to be lower than previous generations and is around 8% lower than it was for Gen Xers (born 1965–1980) and baby boomers (born 1946–1964) when they were in the same age group. A generation’s worldview is certainly shaped by global events specific to their time. Just as millennials face joining a difficult workforce at the wake of the 2008 recession, so their identity and habits will invariably be shaped by the current pandemic.
COVID-19 will increase appetite for low risk investments
A coronavirus-induced recession would invariably increase appetite for lower risk financial products (such as high-yield savings accounts or low-interest fixed income products like CDs), especially to millennials who need liquidity for flexibility to cover debt payments[1], have minimal knowledge about investing, and are economically strained by COVID-19. As rent prices are slashed during the pandemic, millennials may be even further dissuaded away from home ownership.
Millennials are resilient and will bring us out of the COVID-19 recession
As this generation continues to delay major life events like marriage and children, accumulate more student debt, and spend more time in school, we can be assured that millennials will be a resilient cohort who will bring us out of this recession. Education is often an investment that improves productivity and future earnings. As people live longer and retire later, any concerns regarding millennials’ spending and saving habits may be at least partially eased, as they will likely have more time in the labor force to accrue assets and pay off their debts.
Millennials generally invest conservatively for their future
Beyond the prediction that millennials may become more interested in lower-risk financial assets, it is hard to tell how COVID-19 may alter other specific investing habits. According to a Wall Street Journal survey of millennials performed in September 2019, nearly half of millennials want to start investing but don’t know where to begin. Among millennials who do invest, work-sponsored 401(k) plans are the most popular financial product at 41%, followed by individual retirement accounts at 25%, mutual funds and exchange-traded funds at 19%, and individual stocks at 15%. This indicates that millennials generally invest in conservative, retirement-geared investment products. In the same WSJ survey, 34% of millennials found it is a challenge to save for the future due to an overhang of too much student-loan debt. If the economic slump from COVID-19 persists and creates a debt burden on consumers, we can anticipate that a greater proportion of millennials may find it challenging to save for the future.
[1] According to a study done by consumer credit rating company Experian, when asked how Americans plan to pay down their debt, 1 in 3 respondents are expected to rely on savings to make their debt payments in the coming months; another 13% say they will use credit cards; 13% say they will use unemployment benefits; and 5% plan to use an emergency loan to make their debt payments.
