Consumer Demand Will Be Key To The Future Of The U.S. Economy : Planet Money The U.S. economy depends on consumer demand. And demand is way down because of the coronavirus pandemic. What happens if it doesn't come back?
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UNIDENTIFIED PERSON, BYLINE: NPR.

(SOUNDBITE OF MUSIC)

STACEY VANEK SMITH, HOST:

Deb Compton could not be happier about reopening her dog grooming business.

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DEB COMPTON: I am so excited. I'm like, do I know how? Do I still remember how?

(LAUGHTER)

COMPTON: I have my dog at work today to do a dry run to reteach myself how to groom.

VANEK SMITH: Deb is a dog groomer at Pet Supplies Plus in Madison, Wisc.

So, like, do you have, like, regulars or, like, pretty devoted customers?

COMPTON: Yes. I have some people that travel from out of state. So it's...

VANEK SMITH: Really?

COMPTON: Yeah, mostly poodles. I specialize in poodles. Poodles are very elaborate. They have a very specific type of coat.

VANEK SMITH: They have the little poofy...

COMPTON: Yes.

VANEK SMITH: ...Like, little socks and stuff.

COMPTON: Yeah. Yeah.

VANEK SMITH: Yeah.

COMPTON: The little poofy things, exactly. So I specialize in making all those poofy things poofy.

VANEK SMITH: Deb is being modest. She's actually won a bunch of international awards for her poodle grooming, which includes dyeing poodles bright colors, adding leopard spots and zebra stripes and painted-on butterfly wings. It is pretty wild. Pet Supplies' grooming services closed down in March, just as all the dogs were coming in for their spring cuts just as their peak season was ramping up. So weeks later, when it was announced that dog groomers were one of the businesses that could reopen in Wisconsin, Deb says customers started calling immediately, and they haven't stopped.

COMPTON: We're slammed right now. We can't even keep up with the phones. I don't know if you've heard them. They're just ringing and ringing and ringing. Everybody's like, hey, we need to get in now (laughter).

VANEK SMITH: This is what economists call pent-up demand. Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities.

JARED BERNSTEIN: There is a lot of pent-up demand, a lot of conferences that were canceled and movies that weren't seen and restaurant meals that weren't eaten and trips that weren't taken.

VANEK SMITH: As the economy opens back up and businesses start taking customers again, there will be lots of pent-up demand. Businesses will see a surge in orders. And the size of that surge, how much demand comes back, says Jared, is key. That will tell us how much permanent damage was done to the economy.

This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith. Today on the show - demand, people buying stuff. It is the engine of the U.S. economy. Americans buying stuff has fueled a lot of the entire planet's economic growth. And for the last couple months, it's been in kind of a deep freeze as people across the U.S. have sheltered in and businesses of all kinds have closed. As the economy begins to reopen, there is this question, a question with millions of businesses and jobs at stake - what will happen to demand? Will Americans start buying stuff again or will they keep their wallets put away for a while?

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VANEK SMITH: As the economy begins to reopen, economists all over the world will be watching to see what happens with demand. So some demand is just lost forever. Like, maybe you would normally have gone to your favorite restaurant five times over two months. When that restaurant reopens, you might rush right back for dinner and drinks, but you're not going to order five dinners and five drinks. That money from those missed meals and cocktails will be lost forever to that restaurant.

Deb's business has seen this. A lot of her clients would have had a couple of grooming appointments by now. She's thinking in particular of the first dog in her lineup for the morning of the reopening, a Wheaten terrier named Jules (ph).

COMPTON: I can't even imagine what he looks like 'cause he's such a fluffy guy. And we're like - oh, man, we're just, like, envisioning what these dogs look like. He probably looks like he's got dreadlocks or something.

VANEK SMITH: So Deb will only get the money from that one haircut, that one monster haircut for Jules. So some demand is just lost, nothing to be done. But what about going forward? Will demand come back to the level it was? Economist Jared Bernstein says no way. And there are a few reasons for this. The big one? Unemployment.

BERNSTEIN: Most forecasts have the unemployment rate peaking out something between 15% and 20% - I'd probably be on the upper end of that range - sometime later this year.

VANEK SMITH: Twenty percent unemployment - that is double what the unemployment rate was at the very worst moments of the Great Recession. During the Great Depression, unemployment was at 25%. So 20% unemployment, if that happens, would be a stunning, horrible number. It would also have a huge effect on demand. After all, people who have lost their jobs are not going to be buying as much stuff as they would if they had their jobs. Deb Compton says she is really worried about this. Unemployment has become a huge problem in Wisconsin over the last couple of months.

COMPTON: You know, we're kind of big in manufacturing and stuff. And my neighbor across the street from me, she works for a chicken manufacturer, and they laid off, like, so many employees, and she's one of them. And she's got this family, and her severance package was frozen chicken.

VANEK SMITH: And Deb is directly feeling the effects of these layoffs.

COMPTON: Like a lot of my clients, they literally called yesterday and they said, what will the price be? Because they just don't have it. They're like, you know, I'm laid off. What's my bill going to be tomorrow? And I was like, oh, jeez, really? Yeah. Like, somebody that normally would tip, like, a $20 tip can't tip. So it's scary.

VANEK SMITH: Grooming a dog is not cheap. Pet Supplies charges anywhere between $60 and $150 to groom a dog, depending on the size and fluffiness of the dog. So Deb worries demand will dry up, people will come less often or maybe not at all. And even if they do come, their tips will probably be smaller. So Deb is cutting back on her own spending.

COMPTON: I don't want to tap into my savings, you know. It's - you're just crunching down because you don't know where's your next check coming and when's this opening up and, you know, if - are people going to be able to pay their bills? You know, that kind of thing.

VANEK SMITH: When people like Deb start cutting back on spending, it can create an economic situation known as the paradox of thrift. This idea comes from famous economist John Maynard Keynes, and it works like this. When people like Deb are worried about the future, it is the wise and rational move to save more money and spend less. The paradox is what is good for one person is not good for the economy as a whole. When people spend less, that is really bad for businesses. Demand for goods and services goes down, and that can make a recession worse.

And in this case, there's this whole other factor - COVID-19. So even if people have plenty of money and they want to spend it on something like going to a concert or a restaurant or a museum, they might not spend that money because they're scared of getting sick. Deb, for instance, normally goes to a bunch of dog shows and grooming shows in the spring and summer. She shows dogs and also gets dogs ready to show. It is part of her business, part of what she does. But not this year.

COMPTON: There's nothing. It's just canceled. It's just - everything is canceled. And you're just like - I mean, wow.

VANEK SMITH: That is lost income for Deb. It's also lost income for the hotels, restaurants and other businesses that would have fed, housed and sold stuff to all the people going to those events. So unemployment, people cutting back on spending, events canceled because of coronavirus - Jared Bernstein says all of that combined could push many businesses and companies over the edge.

BERNSTEIN: If just tons of businesses close, then I think demand on the other side of this is going to be a much heavier lift because we just won't have an economy in place that's capable of bouncing back.

VANEK SMITH: When it came to the paradox of thrift, economist John Maynard Keynes said the solution was for the government to step in and spend the money that consumers aren't spending or get money to people so they will keep spending. All that would keep the economy growing. And we've seen the government do both of those things in the last couple of months. Economist Jared Bernstein says he's been really impressed by the speed and size of the government's spending and action. Still, he says, even with all of that the damage from COVID-19 could be devastating, and we won't really know how devastating until much later this year.

For her part, Deb is not thinking that far ahead. She is just trying to get her grooming skills back on track, get the grooming tables moved farther apart and other social distancing protocol put in place and, of course, making sure to answer the phones to respond to all of that pent-up demand.

Good luck opening everything tomorrow.

COMPTON: Yeah, thank you. Thank you. I hope everything goes smoothly, and I hope everybody's as happy to see us as we are to see them.

VANEK SMITH: This episode of THE INDICATOR was produced by Camille Petersen, fact-checked by Brittany Cronin. THE INDICATOR is edited by Paddy Hirsch and is a production of NPR.

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