Spending Was Strong Heading Into Omicron, and Will Be After

Digging into the data a little more, the increase in spending was driven by a 0.9% increase in services expenditures. Spending on goods rose just 0.1%. And that is before the bite from inflation, which has been concentrated in goods. Adjusted for inflation, spending on services rose 0.5%, but spending on goods fell 0.8%.

There are a lot of things that could be going on at once. For starters, a fair amount of holiday spending looks as if it was pulled into October, since people were worried that supply-chain snarls might mean they wouldn’t get their gifts on time (a concern that retailers encouraged).

Also, considering how strong spending in goods has been since early in the pandemic, people have by now accumulated so much stuff that a lot of demand has already been sated. Throw in higher prices, and in many instances people might decide to spend their money on something else. And — at least up until the point Omicron hit — that something else might be a meal at a restaurant, a night at the movies or a trip to see family. Services, in other words.

So, what next? Credit and bank card data from both Bank of America and JPMorgan Chase indicate that spending has weakened this month, particularly in services-related categories such as airlines and restaurants — and of course one might have gathered as much from reading the news or walking around. So long as the new wave of Covid-19 cases persists, spending spirits will be dampened.

But the Omicron surge won’t last forever — indeed, given its very speed, and the recent experience of other countries, it might not last very long. In its aftermath, the spending dynamics that were in place last month might well reassert themselves. Next year could be when demand for services really drives spending, and demand for goods moves to the passenger seat.