Below is a complimentary Demography Unplugged research note written by Hedgeye Demography analyst Neil Howe. Click here to learn more and subscribe.

Howe: Pandemic Flattening Services for the Wealthy - 6 26 2020 10 00 00 AM

It’s the richest Americans who have cut their spending the most during the pandemic, which is limiting the economic recovery to a larger degree than in past recessions. Unlike other recessions, this one has decimated the service sector, which depends increasingly on consumption by those at the top. (The New York Times)

NH: Most postwar recession follow a typical pattern.

They are triggered, in the first instance, by a demand shock: People suddenly choose to spend less. The first firms to get hit by this shock are mainly large companies in the housing, mining, manufacturing, and CPG sectors--which often feel the most pain from higher interest rates and inventory backups. And the first workers to get hit are low-income earners in industrial regions far from where wealthy people live.

The pandemic lockdown recession of 2020 is atypical on all three counts.

It has been triggered, in the first instance, by a supply shock: Firms cannot produce or sell to customers. The first firms to get hit are mainly small companies (or sole proprietors) in the service sector--personal services especially. And the first workers to get hit are low-income earners in affluent, urban areas very near to where wealthy people live.

Services, driven by millions of small firms (restaurants alone comprise nearly 15% of all U.S. employers), typically help power our economy through a recessionary patch. This time, services are getting hammered.

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The NYT story explores these themes by reporting on fascinating research by Opportunity Insights, a Harvard policy think tank.

If you track (with daily credit card receipts) the revenues of businesses by zip code since mid-February, what you find is a striking and negative correlation between revenue growth and the average household income in their zip code. Namely, the richer the zip code, the steeper the revenue loss after the lockdown--and the weaker the recovery after re-opening.

As of June 1, firms in the top income quartile of zip codes had lost roughly twice as much revenue as firms in the lower three quartiles. Employment by zip code shows the same trend, though the gap is not as large. (Which probably indicates a greater margin squeeze on these businesses.)

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What kind of businesses are we talking about? Mainly small firms, contractors, and professionals who provide services to wealthy people in relatively wealthy neighborhoods: High-end restaurants, boutique and fashion shops, spas, gyms, therapists, theaters, florists, and so on.

Businesses in Manhattan, especially on the upper east side, have been flattened--while businesses in Harlem and South Bronx have been relatively unscathed.

So what are the rich doing with their money?

For now, at least, they're not spending it. Past recessions have usually been accompanied by some rise in the personal savings rate--with a disproportionate share of that rise coming from the affluent. This time, we're seeing a grotesquely exaggerated response.

The average personal savings rate has skyrocketed to an unprecedented 33% in April. And nearly all of this gain has come from the affluent. According to the Harvard researchers, over half of the consumption decline in April and May came from the top quartile of households.

Meanwhile, the lowest quartile has seen virtually no overall decline in consumption. And that is in part thanks to PPP and UI bonus dollars flowing to the very workers who work (or used to work) in Beverly Hills or Sausalito or along Chicago's Mag Mile.

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Neil Howe is a renowned authority on generations and social change in America. An acclaimed bestselling author and speaker, he is the nation's leading thinker on today's generations—who they are, what motivates them, and how they will shape America's future.

A historian, economist, and demographer, Howe is also a recognized authority on global aging, long-term fiscal policy, and migration. He is a senior associate to the Center for Strategic and International Studies (CSIS) in Washington, D.C., where he helps direct the CSIS Global Aging Initiative.

Howe has written over a dozen books on generations, demographic change, and fiscal policy, many of them with William Strauss. Howe and Strauss' first book, Generations is a history of America told as a sequence of generational biographies. Vice President Al Gore called it "the most stimulating book on American history that I have ever read" and sent a copy to every member of Congress. Newt Gingrich called it "an intellectual tour de force." Of their book, The Fourth Turning, The Boston Globe wrote, "If Howe and Strauss are right, they will take their place among the great American prophets."

Howe and Strauss originally coined the term "Millennial Generation" in 1991, and wrote the pioneering book on this generation, Millennials Rising. His work has been featured frequently in the media, including USA Today, CNN, the New York Times, and CBS' 60 Minutes.

Previously, with Peter G. Peterson, Howe co-authored On Borrowed Time, a pioneering call for budgetary reform and The Graying of the Great Powers with Richard Jackson.

Howe received his B.A. at U.C. Berkeley and later earned graduate degrees in economics and history from Yale University.