Pandemic Shocks and Household Spending*
| Published date | 01 April 2022 |
| Author | David Finck,Peter Tillmann |
| Date | 01 April 2022 |
| DOI | http://doi.org/10.1111/obes.12471 |
Pandemic Shocks and Household Spending*
DAVID FINCK and PETER TILLMANN
Justus Liebig University Gießen, Gießen, Germany (e-mails: david.finck@wirtschaft.uni-giessen.de;
e-mail: peter.tillmann@wirtschaft.uni-giessen.de)
Abstract
We study the response of daily household spending to the surprise number of fatalities
of the COVID-19 pandemic, which we label as a pandemic shock. Based on daily
forecasts of the number of fatalities, we construct the surprise component as the
difference between the actual and the expected number of deaths. We allow for state-
dependent effects of the shock depending on the position on the curve of infections.
Spending falls after the shock and is particularly sensitive to the shock when the
number of new infections is strongly increasing. If the number of infections grows
moderately, the drop in spending is smaller. We also estimate the effect of the shock
across income quartiles. In each state, low-income households exhibit a significantly
larger drop in consumption than high-income households. Thus, consumption
inequality increases after a pandemic shock. Our results hold for the US economy and
the key US states. The findings remain unchanged if we choose alternative state-
variables to separate regimes.
I. Introduction
The global spread of the COVID-19 pandemic since January 2020 led to a sharp
contraction of economic activity in almost all economies affected by the virus.
Between January and April 2020, real personal consumption expenditures declined by
more than 15%. With personal consumption expenditures accounting for 68% of US
GDP in 2019, this decline in spending casts a shadow on overall economic activity in
2020. Consumption recovered in May and June, partly driven by government transfers
which led to an increase in real disposable income.
In this paper, we provide an analysis of the causal effect of the pandemic on
household spending. Spending, such as consumption in general, should mostly be
driven by unexpected shocks. According to the theory of permanent income,
predictable fluctuations in future income should prompt households to tap the capital
JEL Classification numbers:E21, E32, I10.
*We thank the editor of this journal and two anonymous reviewers for very insightful comments. We are
grateful to Carola Binder, Patrick H¨
urtgen, Daniel Grabowski, Salah Hassanin, Peter Winker and the team from
Opportunity Insights for helpful discussions.
273
©2021 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd.
This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivsLicense, which permits use and
distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 84, 2 (2022) 0305-9049
doi: 10.1111/obes.12471
market and smooth consumption, such that consumption exhibits very little
fluctuations.
1
We look at the unexpected number of fatalities of the pandemic and analyse how it
affects spending decisions. We draw on forecasts of the number of fatalities due to
COVID-19 in the US provided by Gu (2020) and contrast the one day-ahead forecast
with the actual number of deaths. A positive forecast error is consistent with an under-
prediction of the number of fatalities or a surprise in the severity of the pandemic
respectively. Importantly, the number of reported deaths exhibits transient drops on
weekends, typically followed by increases during the week. We therefore purify our
shock by regressing it on a set of dummies for each day of the weak. We refer to this
series of unexpected deaths as a pandemic shock and use it as the key explanatory
variable for household spending. As a matter of fact, this is only one possible way to
model the surprising spread of the pandemic. Other surprises, such as the development
of a vaccine, could also have effects on household spending.
2
Our measure of household spending is provided by Chetty et al. (2020) and
consists of debit and credit card transactions in the US. The key advantage of the data
is timeliness. We can track spending on a daily frequency for the entire US economy
as well as for US states. In a series of local projections, see Jord`
a (2005), we estimate
the response of spending to a pandemic shock.
There are at least three channels through which a pandemic shock can affect
spending. First, an adverse pandemic shock could prompt households to restrain
consumption voluntarily. This is because the virus spreads through social interaction
such as shopping in retail stores, dining or entertainment. Anxious households could
reduce these activities even before official lockdown measures are in place. Goolsbee
and Syverson (2021) show that consumer behaviour during the pandemic is more
driven by fear of infection than formal restrictions. Second, households might be
barred from consumption due to a lockdown of selected activities or even shelter-
in-place orders. An adverse pandemic shock makes these measures more likely. Third,
households could perceive an unexpected change in future income and adjust their
spending accordingly. Even if a household is not itself affected by the virus, the future
of entire industries is at risk. Workers in the service sector, for example, cannot resort
to working from home and experience a large drop in future income.
3
While we cannot disentangle these transmission channels, we take account of an
important property that all three channels have in common: the effect of a pandemic
shock should be stronger if the virus spreads more rapidly. The more widespread the virus
is, the larger the reluctance to shop offline, the more likely stricter lockdown measures
and the more severe the drop in future income will be. Thus, the effect of the pandemic
shock should depend on the position of the economy on the infection curve.
Therefore, we generalize our model and allow the pandemic shock to have regime-
dependent effects. In our baseline setting, we chose the growth of the daily number of
1
See Jappelli and Pistaferri (2010) for a survey of the field.
2
We are grateful to an anonymous referee for this point.
3
In a survey conducted early in the pandemic, Binder (2020) finds that households expect an increase in
unemployment due to the pandemic.
©2021 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd.
274 Bulletin
Get this document and AI-powered insights with a free trial of vLex and Vincent AI
Get Started for FreeStart Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting