US services have better defenses against China lockdown

A worker in protective gear takes a swab from a resident at a residential compound under lockdown, following the coronavirus disease (COVID-19) outbreak in Shenzhen, Guangdong province, China March 14, 2022. Photo taken on March 14, 2022. cnsphoto via

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NEW YORK, March 15 (Reuters Breakingviews) – Fresh lockdowns in China’s Shenzen manufacturing hub portend further supply disruptions for companies like Apple (AAPL.O) and higher prices for consumers. Past failures are one of the reasons US inflation has hit a four-decade high of nearly 8%. As items ranging from electronics to cars become increasingly expensive or even unavailable, households will revert to pre-pandemic habits and focus non-essential spending on services like restaurants and travel.

Over the past two years, locked-down Americans have been buying more stuff. For example, spending on durable goods rose 14% in the fourth quarter of 2020 from a year earlier, according to the U.S. Bureau of Economic Analysis. But spending on services fell by 5% over this period. In normal times, services account for around 70% of consumer spending, so this drop means more money has been saved, especially by wealthier households. Consumers have accumulated about $2.6 trillion in excess savings during the pandemic, Moody’s Analytics estimates, more than 70% of which is held by the top fifth of the income distribution.

Consumer spending on goods and services has increased in recent quarters. Yet rising costs, especially for food and energy, will lead to a rebalancing. Consumer prices rose 7.9% in the 12 months to February, according to the Labor Department. As for services excluding those related to energy, they progressed by a less dazzling +4.4%. This will make eating out or booking vacations relatively more affordable for those with cash after paying for basics.

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The spending habits of wealthier households also favor companies like Hilton Worldwide (HLT.N) and Expedia (EXPE.O). According to a 2010 Bureau of Labor Statistics report, the top 20% of households spent four times more on travel than middle-income households, and eight times more than the poorest. fuel and food costs eat up more of the disposable income of the middle and working class. The well-to-do, who have accumulated most of the $2.6 trillion in excess savings during the pandemic, will be able to continue to splurge, however.

A hit from US consumer inflation is bad news for all businesses. But those in the service sector, which have been hardest hit by the pandemic shutdowns, will weather this new storm better.

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BACKGROUND NEWS

– Mainland China reported 1,807 new local symptomatic cases of Covid-19 for March 12, the highest daily figure in two years and more than triple the number of cases the previous day, Reuters reported citing data from the National Health Commission on March 13.

– Shenzhen will suspend public transportation from March 14 to March 20, and residents have been urged to avoid “all unnecessary activities” and not leave the city unless necessary as it conducts three rounds of mass testing, officials said. Shenzhen health authorities in a statement on March 13.

– China accounted for 28% of global manufacturing output in 2018 according to the United Nations Statistics Division.

– U.S. consumers have accumulated $2.6 trillion in excess savings during the pandemic, according to Moody’s Analytics, more than 70% of which is held by the top 20% of the income distribution.

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Editing by Swaha Pattanaik and Sharon Lam

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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