April

Coronavirus and Finance: Early Evidence on Household Spending, and Investor Expectations  

By Scott B. Guernsey, CERF Research Associate 

Sparked by the coronavirus disease 2019 (COVID-19) pandemic, in a televised broadcast on 23 March 2020, U.K. Prime Minister Boris Johnson gave the following instruction: “You must stay at home.” Like most of the world’s governments, the U.K. continues to implement strict lockdown restrictions on households and businesses in order to limit the spread of the disease. Early signs imply these measures are working, as within the past week U.K. Health Minister Matt Hancock confirmed that “[social distancing] is making a difference. [The U.K. is] at the peak.” Moreover, The Economist recently published an article suggesting “coronavirus infections have peaked in much of the rich world.”  

Putting the global economy on indefinite hold, however, has likely created a different set of problems and unknowns, many of which that are more financial in nature. In this short article, CERF Research Associate Scott Guernsey reviews some recent early-stage finance research that explores the impact of COVID-19 on important financial outcomes, such as household spending and investor expectations.  

In the first article, “How Does Household Spending Respond to an Epidemic? Consumption During the 2020 COVID-19 Pandemic”, Professors Scott Baker (Northwestern University), Robert Farrokhnia (Columbia University), Steffen Meyer (University of Southern Denmark), Michaela Pagel (Columbia University), and Constantine Yannelis (University of Chicago) investigate how U.S. households altered their consumption behavior in response to the COVID-19 outbreak. Using transaction-level household financial data, the paper finds that households’ spending markedly increased as initial news about the spread of COVID-19 in their local area intensified. The initial increase in spending suggests that households were attempting to stockpile essential goods in anticipation of current and future disruptions in their ability to frequent local retailers.  

Meanwhile, as COVID-19 spread, more households remained at home, sharply decreasing their spending at restaurants and retail stores, and their purchase of air travel and public transportation. These effects are magnified for households in states that issued “shelter-in-place” orders, with the increases in grocery spending nearly three times larger, and the decreases in discretionary spending (i.e., restaurants, retail, air travel, and public transport) twice as large, relative to households located in states without such orders. Lastly, the paper finds (perhaps surprisingly) that Republican-households, though reporting to (Axios’) pollsters as perceiving the COVID-19 threat as “generally exaggerated”,1 actually outspent Democrat-households in the early days of the virus on stockpiling groceries and (less surprisingly) reduced restaurant and retail expenditure less.  

The second article, “Coronavirus: Impact on Stock Prices and Growth Expectations”, by Professors Niels Gormsen (University of Chicago) and Ralph Koijen (University of Chicago) helps to quantify some of the economic costs associated with COVID-19. Employing data from the aggregate equity market and dividend futures,2 the paper explores how E.U. and U.S. investors’ expectations about economic growth has changed in response to the spread of the COVID-19 virus and subsequent actions by policymakers. The authors forecast that the annual growth in dividends is down 28% in the E.U. and 17% in the U.S. Further, their forecasts imply GDP growth is down by 6.3% in the E.U. and 3.8% in the U.S. The lower bound for the E.U. (U.S.) on the change in expected dividends is forecasted to realize at the two-year horizon at about negative 46% (30%). On the bright side, their estimates imply signs of catch-up growth over the three- to seven-year horizon.3 Finally, they document that news about economic relief programs and fiscal stimulus tends to increase long-term growth expectations but does very little in improving expectations about short-term growth.