As US Consumer Spending Returns to Normal, Interest in Investing Emerges as a Lasting Pandemic Legacy

In the first weeks of 2021—and the pandemic’s second year—US consumers were feeling growing financial pressures that restrained their spending, according to a survey conducted in February. US Consumer Dynamics Report: Q1 2021, part of a series drawn from The Conference Board® Global Consumer Confidence Survey, found that 62 percent of respondents were cutting back on expenses—a 13-point spike from Q1 2020.

However, by the end of the first quarter, caution was giving way to a surge in spending, as consumers began feeling the effects of the latest round of government stimulus. The first quarter also saw an increase in both savings and investments into stocks and mutual funds, as compared to Q1 2020. As set forth in an accompanying report, Category Insights – Financial Services, we expect the increased interest by average consumers in investing to continue, fueled by online apps, a search for higher returns, and the appeal of new vehicles such as cryptocurrencies.

“Our February survey found many US consumers cautious about discretionary spending,” said Denise Dahlhoff, Senior Researcher at The Conference Board. “This suggests the stimulus passed in early March was timely for certain consumers, and we have seen positive spending trends since. For other consumers, their accumulated savings as well as stimulus checks helped fuel a surge of interest in active investments—which may be one of the lasting, if least expected, legacies of the pandemic.”

Among the key insights from the US Consumer Dynamics analysis:

Investment went mainstream during the pandemic, buoyed by consumers flush with cash and in search of larger returns.

In Q1 2021, 17% of US consumers reported investing discretionary income in shares of stocks or mutual funds, up from 13% at the start of the pandemic in Q1 2020.
44% of US consumers put extra cash into savings—up 3 ppts from a year ago. On average, they spent 9% of their household budgets on savings and investments—a historically high share, and up 2 percentage points (ppts) from a year ago.
Government stimulus—and a dearth of alternative spending options amid pandemic closures—helped consumers pay down debt and funnel income into the markets. In Q1 2021, 24% of consumers spent discretionary income paying down credit cards and other debts—down 7 ppts from a year ago. Only 3% of consumers named debt as their biggest concern in Q1 2020, compared to 11% of consumers in Q1 2020.
Low barriers to entry—including apps that allow purchasing partial shares and are accessible 24/7—accelerated mainstream interest in stocks and expanded investing to younger demographics. As a result of these new tools for allowing (and gamifying) active investment among non-experts, risk exposure is growing for a substantial portion of the population.
For those chasing even higher returns—at ever-greater risk—cryptocurrencies are rapidly becoming more prominent and accessible to average consumers.
As stocks and cryptocurrencies enhance risk, there may be an opening for services that support investment decisions and offer alternatives to stocks for more risk-averse people.
As financial-services firms compete to meet surging interest from younger and less financially knowledgeable consumers, they need to balance a unique set of legal, ethical, practical, and reputational factors in serving these new investors.

US consumers cut back substantially on discretionary spending at the start of Q1 2021:

More than 3 in 5 US consumers surveyed in February 2021 reported cutting back on expenses, revealing the financial squeeze many were feeling to start the year.
Discretionary spending was down across the board, compared to both the previous quarter and a year ago (Q1 2020)—except for travel: 25% of consumers reported spending money on travel (holidays/vacation), a 1-ppt uptick from Q4 2020—but still down substantially from the 31% who spent on travel a year ago.
17% of consumers reported having no spare cash to spend in February, compared to just 10% in Q4 2020 and 15% in Q1 2020.
The proportion of consumers spending on home improvements/decorating—which had surged earlier in the pandemic—fell −3 ppts from the prior quarter to 21%.
Likewise, just 13% of consumers reported spending on out-of-home entertainment and new technology products—compared to 21% and 20%, respectively, a year ago in Q1 2020.
Spending on essential goods and services—including housing, groceries, routine transportation, medical, education, and health care—totaled 55% of household budgets in Q1, up +5.3 ppts compared to the previous quarter’s atypical pattern.
One exception to this cutting back was on savings and investments, which accounted for 9% of budgets in Q1, up +1 ppt from Q4 2020 and +2 ppts year over year.