What Happens when Consumer & Retail Interests Misalign? The Battle Between Saving & Shopping Begins.
BOSTON – AUGUST 4: A pedestrian walks past the Lord and Taylor store in Boston on Aug. 4, 2020. … [+]
Boston Globe via Getty Images
The deadline has passed, a wide impasse remains, and American workers and consumers are left hanging in the balance. More than 30 million unemployed Americans lost extra jobless benefits on July 31, and talks between Congress and the White House have stalled in the meantime. At the same time, coronavirus cases are surging, and the supposed economic recovery across the country has stalled. If additional unemployment benefits are cut, with no extension as it currently is, it will have a major adverse effect on spending at the worst time of year as retailers and businesses head into the holiday season.
While Democrats are holding out for a $3 trillion bill that targets health care and economic needs, and Republican officials are pushing for a one-off bill to target individual issues, there’s an increasingly pessimistic outlook on Main Streets across the country. The Trump administration may currently be looking at unilateral actions to alleviate the immediate economic fallout, but the lifeline for many unemployed workers or employees who have spent their one-time stimulus check has been cut off.
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The degree to which additional benefits are cut will impact income, and consumers on the fringe may not be spending that money on discretionary items. If additional benefits are reduced it should provide some cushion to workers, yet still provide an incentive to pursue a job search versus the current dynamic where unemployment benefits equal more money than earning a paycheck for many Americans.
Reducing income for the unemployed could impact more systemic factors like defaults on credit cards, loans, rent and mortgages, or more that could create problems hitting retailers hard. When retailers feel the hit, they may have to use that dreaded strategy of over-discounting. It’s a terrible cascade of economic uncertainty.
The initial one-time payments to Americans were essentially a free cash gift from the government. Many people never expected this, but the initial fallout from the coronavirus, as well as the assumption that lockdown would be temporary to just a handful of months starting in March, means they can’t assume another payment will come. Others are expecting an additional payment to be made to help cover future expenses and some further still may need it because they already spent it.
Any impact to the first group has the highest impact on retail spending. This money is likely viewed psychologically as “free money” by many Americans not in a precarious financial spot, meaning the money could most likely be spent on discretionary purchases like retail or dining out. Furthermore, any reduction or elimination to this cash would mostly impact those discretionary purchases deemed as nice-to-haves such as this season’s new trendy boots or cashmere sweaters.
In terms of retailers bracing for consumers potentially reverting back to a savings mindset, they should keep their eye on the headlines. The minute-to-minute news around the extent of economic collapse fuels consumer psychology. If headlines say Q2 2020 was the worst year on record for GDP growth, and recovery is going to take longer than economists expected, consumers are more likely to squirrel away cash than go out and spend like it’s the end of the world. The overall impact is that consumers may be inclined to revert back to brace for the impending future recession.
Should the government bolster income with incremental unemployment benefits, consumers may obviously feel a bit more financially stable to take care of necessities like daily expenses. This will have the biggest mid-to-long term benefit to prevent larger issues from materializing, like loan defaults and house foreclosures.
The one-time payments are the key to stimulating discretionary spending on things consumers may want to spend on above and beyond their day-to-day expenses. This will only have a short-term benefit to bolstering retail businesses until things stabilize. On the other hand, these stimulus payments could also be delaying the inevitable.
The bottom line is that payments at the same levels or above are the necessary adrenaline shot that retailers need to stay in business until the economy gets better. Unless Congress acts now, small and large businesses alike won’t be able to stay afloat until things recover. Buying time is our best strategy to get through this with minimal business fallout. However, how much time the federal government needs to buy is uncertain. At some point, time will run out and the government won’t be able to bolster consumer spending. That’s when the real pain will begin.