Covid-19 sunk economy primarily because of high-income people cutting back on in-person services. That’s a conclusion from Opportunity Insights’ research on spending and employment, which was recently presented by economist Raj Chetty.
Chetty and his team have amassed a database of private-sector data with much greater detail and frequency than the usual government statistics. Though the project’s goal is better public policy, businesses can use the data to improve profits—or stem losses—by honing in on stronger markets, aligning operations with demand.
Consumer spending cuts by the top income quartile was a much greater problem by by low income ... [+]
Business leaders always have some areas performing better than others, and leaders always wonder if it’s the underlying geography or the local managers. States and metropolitan areas varied widely in their recoveries from the depths of the lock down late-March, according to Chetty’s database. Consumer spending in West Virginia, for example, came back almost to pre-Covid levels by mid-April, and recently is on a par with the beginning of the year. North Carolina has made less progress, and Washington DC even less. Business analysts focused on a particular territory can check out the data at state or county level, and in some cases ZIP codes level. It’s better to understand how location impacts sales than to sack a good manager in a weak location.
Consumer spending data come from Affinity Solutions, which contributes information on credit and debit card transactions by day, location and type of establishment. (Identity information is not included, and categories with little information are excluded to further protect identities.) Combining information about the ZIP code of the card owner with Census Bureau data on average income in that ZIP code, the analysts were able to see that high-income people had a much greater impact on the economy than low-income people. That’s true even though the job-losers were more often low income, and folks who could readily work from home were more often high income, The low-income people used unemployment insurance, including the bonus unemployment payments, along with the economic stimulus checks, to maintain their spending. High-income people cut back mostly on services provided in person, such as air travel, restaurants, and gyms. High-income people did not cut back on getting backyard swimming pools or landscaping services. Thus, the constraint for upper-income families was not money but avoiding risk of the coronavirus.
Company executives often see headline data on employment or income, but they gain more insights by drilling down into the demographics that are their biggest customers.
The composition of spending tells another interesting story. Most of the economic stimulus checks hit bank accounts on April 15, and low-income people immediately increased spending at general merchandise stores (think Walmart and Amazon) and stores selling durable goods, such as appliances. But they did not spend much at the places hurt the most by the recession: airlines, hotels and restaurants. In the aggregate, spending bounced back a good bit, but not in the same way it had gone down. If a company’s sales didn’t bounce back like the overall total, then it’s time to narrow focus to the company’s particular product lines.
Companies selling business-to-business can use Womply’s portion of the database to look at small business openings and net revenues, with some breakdown by industry. Again, the data are available daily at the county or state level, providing huge competitive intelligence in a free resources.
Although the Opportunity Insights team is heavily focused on policy, they probably offer greater value if their data and analyses are used by businesses. Although my fellow economists like to believe that their insights can lead to great improvements in people’s lives through better government programs, the reality is that public policy is more often ham-fisted and marred by pork-barrel concerns and party politics. The public benefit from better business operations, though, is huge. Getting goods to buyers in the quantity and styles they want is tremendously important to the overall economy. Resources are wasted when goods and services are offered that the public does not to purchase. At time of such turmoil as we have had, access to highly granular data can help businesses match their offerings to the needs of consumers and other businesses.
