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Panos Mourdoukoutas
Panos Mourdoukoutas
Articles (44) 

Post-Covid-19 Global Economy: Boom or Bust?

Pent-up and pent-down demand has set up the post-Covid economy for both a boom and a bust

November 23, 2020 | About:

With several vaccines to be rolled out within the next few months, it seems the pandemic crisis could be lessened sooner than expected. This could mean that the global economy will stage a stronger recovery.

However, the recovery will be uneven, with some cyclical sectors expanding (e.g., dining out and traveling) while others (e.g., home-buying, home improvement, home furnishings, recreational vehicles) contracting.

Arguably, the post-Covid-19 economy could experience a recovery of a simultaneous "boom and bust" for discretionary items. To understand this rather unusual recovery pattern, we must first understand the concepts of "pent-up" and "pent-down" demand.

Pent-up demand is a familiar concept. The lack of current demand for discretionary (cyclical) items like automobiles, homes, appliances, traveling, etc. Pent-up demand is usually built in periods of economic bust, when rising unemployment and falling incomes depress consumer confidence, so they put off buying discretionary (cyclical) items. This trend then disappears when the economy recovers and these conditions reverse course.

Pent-down demand, which is a less familiar concept, defers spending on discretionary items to the future and eventually boosts demand for these items when the future arrives. It usually builds in periods of economic booms, when falling unemployment and rising incomes create a euphoria that leads to the overbuying of discretionary items.

Simply put, pent-down demand "steals" sales for high-ticket items from the future. It causes market saturation and eventually depresses spending on these items when the future arrives.

Apparently, pent-down and pent-up demand are two opposite concepts that cannot coexist in typical recessions and recoveries.

But the Covid-19 recession wasn't a typical recession. While unemployment skyrocketed, some consumers' incomes dropped modestly thanks to quick and generous fiscal packages that allowed them to maintain most of their spending habits.

Then there were the voluntary and involuntary lockdowns that forced people to stay home, giving them time to pursue other projects and hobbies. Some people even decided to move from cities to suburbs. Thus, a boom in home sales, home improvement projects, gym equipment and furnishings in the middle of a recession! This trend benefited the stocks of homebuilders like D.R. Horton (NYSE:DHI) and home improvement companies like Home Depot (NYSE:HD).

The post-Covid-19 expansion won't be typical either. Consumers are expected to rush to buy what they resisted during the Covid-19 recession, as well as start dining out more and traveling, but they are also expected to cut down on home purchases and home improvement projects.

Pent-up and pent down-demand coexisted in the Covid-19 recession, fueling a simultaneous boom and bust. And they will coexist in the post-Covid-19 recovery, fueling a boom and a bust, though for different items than during the recession.

And that could be a boon for restaurant and traveling stocks, but a bust for homebuilding and home improvement companies.

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About the author:

Panos Mourdoukoutas
I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.

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