How Will Consumers Spend Their Money This Holiday Season? An Economist Explains

For much of this year, the American economy has undergone an unprecedented structural shift. Billions of dollars in spending by consumers moved from goods — the stuff we consume and use — to services. But many of these same services will come under threat in an economic downturn, and risks to industries producing both goods and services will likely last throughout the winter. So where will the economy finally land?

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Starting in the spring of this year, consumers apparently became fed up with ordering things online for delivery and consumption at home. They wanted to get out and enjoy services that were only available away from their stuff-filled nests. The weather improved, ballparks opened for spring training, and lo and behold: spending on durable goods , adjusted for prices, was 9% lower in March 2022 than in March 2021, while spending on services was 6% higher.

We saw this change firsthand, as the volume of shifts booked on our platform for hospitality services — by businesses like restaurants, caterers and entertainment venues — grew more quickly than the numbers for work in retail and industrial roles. The share of shifts booked in hospitality rose by 17 percentage points between January and June. But by October, this tidal wave of a trend had already begun to ebb away, and the share of shifts in hospitality had dropped by 13 percentage points.

The tide goes out

Perhaps the consumers who had gobbled up meals at restaurants and gyrated their way through concerts had gotten the urge to splurge out of their systems. Maybe the travelers taking revenge were finally sated. The pent-up demand, as economists call it, had run its course.

That's one explanation, anyway. It's also possible that the rising costs of services in the leisure and hospitality industries, which are still more than 1 million workers short of their pre-pandemic levels, eventually made consumers think twice about going out. And then there's the elephant in the room: the possibility of a recession .

In a recession, consumers worried about their incomes typically trim their spending on non-essential services. They may stop going out altogether, or they may just decide to trade down: fast food replaces white tablecloths, and movie tickets replace trips to the ballpark. Sometimes, the sellers of cheaper services can benefit from this trend. But on the whole, it's bad news for the very same industries that were riding high in the sunny spring and summer.

For some businesses, the transition has probably felt natural. The baseball season is over in most cities, restaurants are used to losing their outdoor tables when temperatures drop, and families who traveled over the summer have had their kids back in school for months. Plenty of service providers are used to trimming their payrolls in the fall.

Chilly weather ahead?

The question is, what happens next? The holiday season usually comes with a big uptick in consumer spending, but people may be a little more cautious this time around. Economists expect rising unemployment , and epidemiologists are watching new waves of Covid-19, flu and RSV infections . Combined with continuing inflation, these factors could put a damper on the usual holiday splurge — especially in services consumed outside the home.

Non-essential goods like game systems and upgraded smartphones could also face the axe, and more consumers are likely to put off purchases of big-ticket items. Moreover, the effects of consumers' choices could last into early 2023, since people who stretch their budgets to maintain holiday spending will have less money to work with afterward.

One company with a good view of retail spending habits is Mastercard, one of the world's biggest credit card networks. As of last month, the company anticipated that holiday spending in dollar terms would be 7.1% higher than in 2021 . But with inflation running at around 8%, this means consumers may actually be buying less than last year in terms of the real value of goods and services. For comparison, the growth in holiday spending between 2020 and 2021 was 8.5% against inflation of about 7%.

Other signs have pointed to a weaker holiday season, too. Major retailers haven't hired as many holiday workers as usual, even though more Americans are looking for holiday jobs. With less demand and more supply of labor, hourly pay is likely to fall along with the number of hires — and that means less income for consumers to spend. And if there's a sudden shock from the war in Ukraine or the financial system, all bets are off.

A dose of holiday cheer

Yet in the midst of all this doom and gloom, there might be a flicker of light. With pay increases slowing , the housing market cooling and the economy growing only moderately , the Federal Reserve may soon slow the pace of hikes in short-term interest rates. The possibility of a "soft landing" for the economy is again coming into view.

In fact, given a somewhat disappointing baseline, the upside risks for the holiday period may now outweigh the downside risks. Managers need to ask themselves, "What if my demand is 10% above expectations? What about 20%?" and so on. This means planning for different scenarios, keeping in close touch with suppliers and having the tools to manage labor needs on short notice. And it's already happening — at Instawork, we had record signups by businesses on our flexible work platform in October. Indeed, the dip in holiday hiring could partly be a signal that employers intend to rely on flexible work booked at short notice.

It's never easy to turn on a dime, but the collision of trends in consumer spending and the overwhelming uncertainty in the economy are putting a premium on agility. Fortunately, agility is a skill that doesn't go away, and an improvement in how businesses manage through uncertainty could put the economy on a firmer footing in 2023. Now isn't that a holiday gift that everyone would enjoy?