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Boise State economist explains how buying behavior during a pandemic affects the economy

Image provided by the Foreign Policy Research Institute

People who are stuck at home, isolating themselves from the risks of catching or spreading COVID-19 will spend less than they normally do, right? According to Samia Islam, an associate professor of economics at Boise State, it might not be that simple.

Samia Islam
Samia Islam

“As the number of COVID-19 cases began to increase, households sharply increased their spending across a number of major categories like food and household essentials,” she said. “But this was then followed by a sharp decrease in overall spending. This effect varied by states and the stringency of the shutdown measures.”

Economists around the world are racing to collect, properly vet and interpret findings that relate to the current and ever-changing conditions of the pandemic. Since the U.S. ordered shutdown measures in March, a small number of studies using U.S. and European data have been released. For instance, a study of 8,000 households in the U.S. examined the unpredictable events that have a widespread impact on the economy, referred to as shocks, for both income and wealth. The study determined that that expectations around household spending are more affected by income shocks, which are more pronounced for younger households and those with lower income and wealth, rather than by wealth shocks, which are typically stronger for middle-age households with relatively higher wealth and income.

The impact on consumer spending

On average, discretionary spending for goods and services like entertainment, personal care, eating out and alcohol makes up about 30 percent of total household purchases in the U.S. Islam pointed out that as teleconferencing activity on Zoom and Skype increased due to states’ stay-at-home orders in April and May, retail data confirmed that the sales of shirts and other tops increased, whereas the sale of pants and other bottoms were down.

“In all of this, e-commerce giants like Amazon do stand to see a dramatic increase in sales revenue as more retail transactions are diverted to them, even for those items that households would have typically purchased from local brick-and-mortar stores,” she said. “I myself bought snack items on Amazon – something I have never done before.”

The emotional coping behavior referred to as “diversion buying” also can play a part in unusual spending for homebound consumers during the pandemic. Islam referenced a study from Japan that found that diversion buying less expensive goods does not release nearly the amount of stress when compared to more expensive purchases. Retail therapy, on the other hand, connects shopping to mood regulation, and economists point to this behavior more frequently. The ability for people to distract themselves from uncertainties and stresses, like the current coronavirus, is more accessible than ever before thanks to smart phones and tablets.

Then there’s the effect of social distancing measures on spending to consider. Although Denmark imposed stronger restrictions on social and economic activities when compared with Sweden, a study of the two countries found that both experienced a similar decrease in aggregate spending. The researchers concluded that the majority of the decrease was caused by the pandemic itself, not necessarily social distancing restrictions.

And then there’s compulsive buying and hoarding, a type of behavior that economists like Islam were anticipating.

“People are not very good at making choices under uncertainty, and that rationality proves to be a very strong assumption when decisions involve uncertainty and risk,” said Islam. “So in situations that involve perceived increase in risk and uncertainty such as the COVID19 shut-downs, what we saw happen with the toilet paper buying and hoarding spree two months ago was not entirely unexpected, based on what we know.”

The impact on local businesses

Small businesses make up a large portion of Idaho’s economy. More than 95 percent of the state’s businesses have less than 50 employees, and these companies account for nearly half of Idaho’s total employment and wages. Small businesses that typically have limited resources are the most vulnerable when unpredictable events occur that disrupt or even shut down the economy.

Islam pointed to an April survey of small business owners in Idaho that was reported on the Idaho Department of Labor website. Only 42 percent of the participants felt that their business would survive the pandemic, yet the majority of owners expected to lose more than half of their revenues in the next month. Aside from the survey, the department also reported that the sectors in Idaho that are most impacted are accommodation and food service, health care and social assistance.

It’s never too late to start a “rainy day fund”

As COVID-19 continues to affect the economy, Islam recognized that the vulnerability of Americans who do not have enough savings to get through a couple of weeks or a month is a problem. And yet this problem also relates to decisions that are made in the business sector.

“This crisis has exposed that the contemporary business strategy of relentless expansion and growth, coupled with the ever increasing pay raises and bonuses for upper management, may not be in the best interest of the national economy as a whole.”

What’s her advice?

“Maybe it’s time to consider and even plan for the off-chance of a ‘rainy day.'”