Morningstar - Q3 2022 - 44

Strategies
Spending Shifts Back to Services
As consumer behavior normalizes,
here's where to invest.
CONSUMER
David Sekera
In March 2020, restaurant reservations were
canceled, vacations were put on hold,
and social distancing quickly became the norm.
Consumer spending shifted into pantry-loading,
electronics to support working from home,
and home renovations.
The COVID-19 pandemic led to one of the most
rapid shifts in consumer spending behavior
in history. Spending on both goods and services
initially fell off a cliff in April 2020. But between
several stimulus payments and other government
programs such as the Paycheck Protection
Program, spending on goods recovered quickly and
EXHIBIT 1
Deviations From the Norm Consumer spending on goods, which quickly rebounded
early in the pandemic, has far exceeded normal trends. Spending on services,
however, has lagged.
Real Personal Consumption, % Cumulative Growth
Goods
Trend Goods
Services
Trend Services
30
13.10
8.85
4.73
0.65
15
-15
-30
02/2020
09/2020
Source: Morningstar. Data as of 05/31/2022.
04/2021
11/2021
05/2022
Where to Invest?
As spending shifts back into services, one of the
areas that we think is best poised to benefit is
the travel industry, which comprises such services
as air travel, cruise lines, gaming, hotels, ridehailing,
and technology providers dedicated to the
travel sector. Also, there are other areas that
we think could benefit from employees returning
to work and consumers returning to public events.
Air Travel
Leisure air travel has largely rebounded, but
both business and international travel have lagged
the overall recovery. While videoconferencing
has become more commonplace, we project that
business and international travel will return
to prepandemic levels by 2024. While the stocks of
all the airlines are currently undervalued, we
think Delta Air Lines DAL is best leveraged to the
44
Morningstar Q3 2022
then soared. Consumers, however, were either
unable or unwilling to spend on services.
The cumulative amount of growth of spending
on goods since January 2020 peaked in
early 2021 and has slightly declined. But the
emergence of several COVID-19 variants over the
past year has slowed the normalization of
consumer spending on services (EXHIBIT 1 ). As the
pandemic recedes, however, we expect that
consumer spending will return to prepandemic
trends between goods and services.
What Will Spending Normalization Look Like?
Morningstar forecasts that the current deviation in
spending on goods and services will converge
back to their prepandemic trend by mid-2023. This
would equate to about a $450 billion shift from
spending on goods to services and could even be
larger if households, already saturated with
many categories of goods, have pulled forward
future demand. In addition, households
may seek to make up for the services forgone
during the pandemic
Restaurants and hotels, recreation, and
transportation account for about half
of the current shortfall from the normal spending
trend (EXHIBIT 2 ). These areas represent
only 20% of total services spending but have been
heavily affected by the shift in spending
behavior. Spending on restaurants and hotels
is down 4% from the normal trend, yet built-up
demand may be much higher than normal,
given that discretionary spending on goods
remains well above prepandemic trends.
Areas such as recreation and transportation have
the largest ground to make up.
Healthcare spending is running about 6%
below trend, but considering it accounts for 25%
of services spending, it makes up a significant
percentage of the total services spending
gap. Many consumers delayed medical services
and elective procedures during the pandemic,
but Morningstar expects that backlog will
begin to work its way through the healthcare
system as people feel more comfortable
going back into doctor's offices and hospitals.
https://www.morningstar.com/authors/1514/david-sekera https://www.morningstar.com/stocks/xnys/dal/quote
Morningstar - Q3 2022

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