The Limits to America’s Pent-Up Demand

Notwithstanding the predictable release of pent-up demand for consumer durables, face-to-face services show clear evidence of lasting scarring. Consequently, with the snapback for durables likely to be finished soon, even rapid vaccination is unlikely to shorten the tough time that lies ahead for the post-pandemic US economy.

Stephen S. Roach





NEW HAVEN – As the second vaccine shot went into my arm, I could almost taste the instant gratification of deferred desires. 

Having done without for nearly a year, it was time to indulge.

While I was lucky enough – actually, old enough – to be included in the first wave of inoculations, the rest of America is about to follow. 

The possibility that broader vaccine distribution will lead to “herd immunity” by the end of 2021 is no longer fanciful. 

And with the end of the COVID-19 nightmare, goes the argument widely discounted in financial markets, long-deprived US consumers can finally relax and enjoy the glorious V-shaped recovery.

If only. The concept of pent-up demand is well studied in economics. 

While it typically applies to the consumption of durable goods – cars, furniture, appliances, and the like – it has also been used to describe residential construction activity and business investment in plants and equipment.

The idea rests on a basic premise of dynamic demand models known as the “stock-adjustment” effect: an unexpected development that prompts a deferral of spending on long-lasting items with a finite lifetime does not mitigate obsolescence (physical or technological) and the associated need for replacement. 

It follows that once the interruption ends, a surge of postponed, or pent-up, replacement demand can spark economic recovery.

Typically, the bigger the shock and the associated deferral of replacement demand, the stronger the rebound. I tell my students to imagine a big rubber band: the more you pull it, the greater the snapback when you release it.

This works well in explaining the temporary impact of what economists call exogenous shocks like natural disasters, strikes, political upheavals, and wars. It works less well for shocks that can cause lasting economic scarring – like financial crises and, yes, pandemics.

Recent trends in US consumer spending suggest that the natural forces of pent-up demand may largely be spent. Over the final eight months of 2020, the post-lockdown rebound of durables consumption was fully 39% greater than what was lost during the lockdown in March and April. 

As a result, durables consumption rose to 8.25% of GDP in the second half of 2020 – the highest share since early 2007 and well in excess of the 7.1% average over the 2008-19 period.

There is probably some more to come. 

On the heels of another tranche of federal relief checks issued in December ($600 per eligible recipient), the 5.3% surge in retail sales reported for January – dominated by outsize gains for durable items such as electronics, appliances, and furniture – provides further evidence of consumer euphoria. 

And with an even larger round of $1,400 checks in the offing as President Joe Biden’s “American Rescue Plan” takes hold, additional impetus from consumer durables seems likely.

At that point, however, pent-up demand should be exhausted. This is even more apparent when assessing the extraordinary power of the recent surge in consumer durables relative to pent-up demand cycles in the past.

Since the early 1990s, recoveries in personal consumption have been relatively muted. But in the seven cyclical expansions from the mid-1950s through the early 1980s, the release of pent-up demand boosted consumer durables’ share of GDP by 0.6 percentage points, on average, in the four quarters following business cycle troughs. 

From this perspective, the recent increase in consumer durables’ share of GDP of fully 1.35 percentage points from the 6.9% low hit in the first quarter of 2020 is all the more extraordinary. 

At more than double the earlier cyclical norm, it is all the more unsustainable.

At the same time, the powerful release of pent-up demand, aided by unprecedented support from fiscal and monetary policies, is masking a lingering undercurrent of consumer skittishness that is likely to endure long after the bulk of the US population is vaccinated. 

The so-called long shadow of earlier major pandemics offers ample historical precedent for this scenario.

So do recent data showing signs of scarring in the services sector – especially in activities that require face-to-face contact such as travel, leisure, and entertainment. 

Vaccines or not, face-to-face interactions are at odds with a now deeply-engrained awareness of personal health risks that will most likely influence consumer behavior for years to come.

That’s what the numbers show. Unlike the powerful rebound of consumer spending on durables, the post-lockdown rebound of services from May to December 2020 recouped just 63% of what was lost during March and April. 

Unsurprisingly, services, which make up a little more than 60% of total US consumption, are being held back mainly by face-to-face activities such as transportation (travel), recreation (leisure), and restaurant dining. 

Collectively, these three spending categories, which accounted for fully 61% of the lockdown-induced plunge in total consumer services, remain 25% below their peak in the fourth quarter of 2019.

This same hesitation in consumer services demand is mirrored by comparable trends in the US labor market. While there has been a significant rebound of hiring since lockdowns were lifted last spring, total nonfarm jobs remain 9.9 million below the February 2020 peak.

Again, the reason is hardly surprising. 

Fully 83% of that shortfall has been concentrated in face-to-face private services such as transportation, leisure and hospitality, accommodations, food services, retail trade, motion pictures and sound recording, and non-public education. 

New research points to more of the same: post-COVID-19 headwinds in services are likely to be an enduring feature of the US labor market.

So, notwithstanding the predictable release of pent-up demand for consumer durables, face-to-face services show clear evidence – in terms of both consumer demand and employment – of permanent scarring. 

Consequently, with the snapback of pent-up demand for durables nearing its point of exhaustion, the recovery of the post-pandemic US economy is likely to fall well short of vaccine development’s “warp speed.”



Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.

DAX vaxxers

Companies take charge of Germany’s vaccination drive

A sluggish public vaccination campaign spurs Deutschland AG into action



Germans are used to being top of the class. 

Early in the pandemic, when Germany controlled its outbreak better than most of the West, they felt they were. 

In vaccinating citizens against covid-19, by contrast, the country has been a laggard. 

One in 20 has received a shot, compared with nearly a third of Britons, a sixth of Americans and, as Die Welt, a daily, recently grumbled, even a tenth of Moroccans.

German bosses are losing patience. Many workers at the industrial firms that dominate corporate Germany are vulnerable to covid-19 because factory or construction jobs cannot be done from home. 

Nearly all companies in the dax 30 blue-chip stockmarket index, as well as countless ceos of smaller firms, are therefore preparing to launch their own immunisation drives. 

They include basf and Bayer (in chemicals), bmw and Volkswagen (carmaking), Deutsche Wohnen and Vonovia (property development) and rwe (energy).

The vaccines will come from the government, which has the doses but apparently not the capacity to get them quickly into arms. 

Firms are buying ultra-cold freezers for shots that need such storage. 

The jabs will be administered by company doctors. Germany has between 15,000 and 20,000 of them (not counting nurses), many more than other European Union countries, America or Britain. 

About one-third of them are employed directly by firms and the rest run practices that serve employers in their area.

Anette Wahl-Wachendorf of vdbw, an association of company doctors, hopes that from April such medics will be able to dispense jabs alongside family physicians and 400-odd public vaccination centres. 

They may reach perhaps 45m employees and their relatives, she reckons. 

That is more than half of all Germans.

“As soon as we get the vaccine, we will get started,” promises Rolf Buch, boss of Vonovia. His firm has already set up centres that will, starting this month, test employees who wish to return to the office for the virus. 

These venues will be used to vaccinate its 10,000 employees and adult members of their immediate families, in keeping with official guidelines on who gets priority.

German labour law allows companies to give bonuses to workers who get vaccinated for any illness (though not at this time to make vaccination mandatory). 

Such carrots are common in America, where Aldi and Lidl, two big German supermarkets, are offering workers payments of up to $200 to roll up their sleeves. 

Neither grocer, nor any other big German firm, is currently planning to use such incentives at home, for fear of the controversy this might cause (see article). Still, Mr 

Buch expects the vast majority of his staff to accept the offer of free shots. Those who decline may be barred from office parties and other group activities.

Once Mr Buch is done with Vonovia employees and their families, he is willing to turn the company’s centres over to the general vaccination effort. Other bosses are starting with the broader population. 

In early December, before the first vaccines were approved for use in the eu, business folk in Bremen, a city in north-west Germany, launched a campaign to convert an exhibition centre next to the central railway station into a giant vaccination site. 

Kurt Zech, a hotel-and-construction tycoon, contributed furloughed staff. Mercedes, a carmaker, threw in tables and chairs. Another company donated laptops. 

A software firm adapted its programs for use in a call centre that helps residents to schedule appointments.

Thanks to the pushiness of Bremer businesspeople, up to 16,000 of their fellow burghers a day will get jabbed from mid-March, more than ten times what the local government had planned. 

Their goal is to have 70% of the city’s adults inoculated by the end of July, months ahead of the government’s schedule.

When is stimulus too much for markets?

What is good for more inclusive economic growth may not be positive short-term for investors

Mohamed El-Erian 

In extrapolating the impact on asset prices of continued Fed liquidity injections, investors must now take into account the impact of also ‘going big’ fiscally © EPA-EFE


For many years, the operational simplicity of positioning investment portfolios has contrasted sharply with the complexity of national and global economic outlooks.

By getting the central bank policy call right and simply overweighting index products, investors profited substantially from both stock and bond investments. 

Meanwhile, economists struggled to predict even basic economic variables such as growth and inflation.

This configuration may well be changing, and not because the massive liquidity injected by the US Federal Reserve is likely to stop any time soon. It won’t.

Rather, more fiscal policy is now set to add to the Fed’s flooding of the system with liquidity. This raises interesting questions as to whether the beneficial result for markets will compound or, instead, involve volatile contradictions requiring careful active management.

Powered by ample and predictable liquidity injection, investors set aside many traditional economic and political influences as the Fed vacuumed up securities at non-commercial prices. 

The indirect effect has proved as consequential, conditioning investors to buy every market dip, whatever the cause, and allocate more capital into ever riskier investments.

In his recent remarks, Fed chair Jay Powell has made it clear that the central bank has no intention of changing this policy approach, be it the large-scale purchase of securities (currently running at $120bn a month, or about 7 per cent of gross domestic product on an annualised basis) or rock bottom policy rates.

This is despite a brighter outlook due to the accelerating spread of vaccination, success in lowering infections, ultra-loose financial conditions and multiplying indications of excessive risk-taking. 

The latter includes the proliferation of speculative special purpose acquisition companies, the record pace of more corporate debt issuance and a surge in trading using borrowed funds.

But in extrapolating the impact on asset prices of continued Fed liquidity injections, investors must now take into account the impact of also “going big” fiscally. 

The first part of this involves the Biden administration seeking congressional approval for a $1.9tn (about 9 per cent of GDP) stimulus plan. 

A second package is planned to follow this focused on infrastructure, taking the total fiscal effort to an estimated $3tn to $4tn (14 per cent to 19 per cent of GDP).

Investors’ initial reaction was to see the two massive injections to be wonderfully additive for asset prices. Stocks rose to several record highs in the first six weeks of the year. 

In the past few days, however, while market chatter remains exuberant, investors are slowly being forced to confront an issue that is already hotly debated among economists: when is so much stimulus too much stimulus?

The argument for never is based on the view that endless liquidity injections guard against most corporate bankruptcies. The counterargument stresses twin liquidity fears. 

One is the destabilisation of inflationary expectations fuelling too rapid a steepening in the yield curve, disturbing investor conditioning, and increasing the probability of a market accident.

The second is that, with a Fed reluctant to taper its stimulus, it faces lose-lose policy options — let the risk of financial instability rise and threaten the real economy or intervene further in the functioning of markets, worsen wealth inequality and risk more distortions that undermine efficient financial and economic resource allocations.

Given how far and how fast markets have already run, what is good for more inclusive economic growth may not be positive in the short-term for investors. 

Moreover, conscious of its “implicit contract” with markets, the Fed is likely to react to too fast a move in yields by loosening policy even more, despite existing financial overheating concerns. 

This would only worsen an already unhealthy codependent relationship with markets.

The answer is not to abandon the fiscal stimulus. Rather, it is to improve its immediate relief targeting and accelerate the long-term growth impact. And the Fed needs to consider seriously how best to slowly lift its foot off the monetary accelerator.

This much-needed handoff, from monetary to fiscal, would be a lot smoother if prudential regulations were to catch up more quickly with the massive migration of risk from banks to non-banks, including “sand in the wheel” measures to moderate excessive risk-taking. 

The longer this three-dimensional solution evades us, the greater the risk of financial instability undermining economic wellbeing.


The writer is president of Queens’ College, Cambridge university, and adviser to Allianz and Gramercy

The 4 Great Migrations

America as we have come to know it is most likely a thing of the past.

By Charles M. Blow

San Antonio area residents in line at a food distribution center on Sunday. A winter storm in Texas left millions without power or running water.Credit...Christopher Lee for The New York Times


The humanitarian and infrastructure disaster that followed Texas’ winter storm illustrates that catastrophic weather events may soon become less freak occurrences and more part of an unremitting new normal.

It should also remind us of how a new era in which extreme weather is normal will push — or force — some to migrate to new locations less impacted by this weather.

As a report resulting from a partnership between ProPublica and The New York Times Magazine, with support from the Pulitzer Center, found:

“Across the United States, some 162 million people — nearly one in two — will most likely experience a decline in the quality of their environment, namely more heat and less water. For 93 million of them, the changes could be particularly severe, and by 2070, our analysis suggests, if carbon emissions rise at extreme levels, at least four million Americans could find themselves living at the fringe, in places decidedly outside the ideal niche for human life.”

The United States alone — not to mention other areas around the world — is likely to see millions of climate migrants in the coming decades.

This has the potential to reshape the country, culturally, economically and politically. 

But it isn’t the only migration threatening to do that. 

There will be at least three other major migrations happening concurrently with the climate one in this country: immigration from other countries, urbanization led by younger people and the reverse migration of Black people from cities in the North and West back to the South.

First, immigration. According to a 2015 Pew Research Center report, “Immigrants and their children will represent 36 percent of the U.S. population in 2065, which equals or surpasses the peak levels last seen around the turn of the 20th century. That share will represent a doubling since 1965 (18 percent) and a notable rise from today’s 26 percent.”

The report states that “the arrival of new immigrants and the births of their children and grandchildren account for 55 percent of the U.S. population increase from 193 million in 1965 to 324 million today. 

The new Pew Research Center projections also show that the nation is projected to grow to 441 million in 2065 and that 88 percent of the increase is linked to future immigrants and their descendants.”

The displacement of a white majority and the rise of majority-Hispanic states in the Southwest will have major consequences.

Furthermore, we will reach the point at which the Hispanic population will be nearly double the Black one and the Asian population will be larger than the Black one. This will reorder the meaning and influence of minority groups.

Then there is migration by younger Americans. As NPR reported in 2014, young people moving away from small towns for the big city has “long been the story line in small-town America,” but “it turns out the millennial generation is only accelerating the demographic shift. 

In fact, this may be the most ‘bright lights, big city’ generation in history.” NPR continued, “While the number of millennials is ticking slightly upward in small towns and rural areas, it’s nothing compared with the growth of their numbers in suburbs and cities.”

And, as Bloomberg reported in 2019:

“A new peer-reviewed study (the article is forthcoming in the Journal of Regional Science) finds that not only have young people been a driving force in the urban resurgence of the past two decades, but they favor living in central urban neighborhoods significantly more than previous generations did at the same stages in life.”

Finally, there is the reverse migration of Black people from cities in the North, Midwest and West to the South.

As The New York Times reported after the last census:

“The percentage of the nation’s Black population living in the South has hit its highest point in half a century, according to census data … as younger and more educated Black residents move out of declining cities in the Northeast and Midwest in search of better opportunities.”

The Times continued:

“The share of Black population growth that has occurred in the South over the past decade — the highest since 1910, before the Great Migration of blacks to the North — has upended some long-held assumptions.”

I predict and expect that this reverse migration will only continue and intensify.

Great migration movements are going to dramatically change America in the near future, upending the geography and structures of power, and it is hard to see how the country emerges on the other side of it. 

We may well be on the verge of a New America, a reshuffled United States, in which power, to some degree, is redistributed and exercised by emerging power players and power centers.

America as we have come to know it is likely a thing of the past. 

Migratory movements have continually reshaped this country and that trend shows no signs of ending.

America’s Iran Strategy

By: George Friedman


President Barack Obama’s administration had a primary goal in the Middle East: It did not want Iran to become a nuclear power. 

It did not want Israel to be forced to launch a preemptive strike against a nuclear Iran, triggered by the public declaration of Iran’s intentions against Israel. 

American allies in the region – Saudi Arabia and the United Arab Emirates, among others – were frightened that a nuclear Iran might compel them into a subordinate position. 

And the Obama administration, dedicated to military disengagement from the region, was afraid that to calm regional fears, the U.S. would have to take military action against Iran’s emerging power, with dangerous consequences.

Obama’s administration engineered an agreement with Iran under which Iran would agree to stop its nuclear weapons program and permit international technical monitoring of the program. 

Implicit in the agreement was that if Iran complied with the terms of the deal, broader agreements would emerge, allowing Iran to normalize its relationship with the outside world and increase its economic well-being.

The agreement was criticized at the time for three reasons. 

First, Iran was capable of both permitting inspections and evading them, by shifting the location of the nuclear program. Iran has many caves and tunnels where nuclear activities could be concealed. 

Inspections are focused on known facilities because of the dearth of inspectors and the breadth of the country. In other words, inspections appear to be a reliable guarantee, but their reliability is inherently uncertain. 

Second, the agreement did not address Iran’s relations with other countries in the region, against which Iran has carried out covert and overt operations. So it did not do anything against Iran in Syria, Lebanon or Yemen, nor did it do anything about Iranian destabilization of and strikes against other countries, such as its attack on a Saudi refinery. 

Finally, it did not address Iran’s missile program, which seems to involve missiles of multiple ranges and payloads. If Iran were building a nuclear-capable medium-range missile, as some claimed, then there was a mystery. 

If Iran were abandoning its nuclear program, why spend scarce resources on these kinds of missiles?

The Obama administration’s position was that all of these were important issues but that reaching a long-term understanding with Iran required a step-by-step approach. 

If the U.S. sought everything at once, it would achieve nothing, and the goal was to use economic incentives to draw Iran forward. 

His critics said that the patient approach left the door open to dangerous offensive operations, and that, as protecting the agreement would inevitably become a political objective, Iranian actions that violated American interests but not the agreement would be overlooked with the hope of preserving the nuclear deal. 

There were arguments to be made on both sides, but the core issues were that the guarantees against a continued nuclear program were uncertain in their performance and that the agreement left Iran with significant nonnuclear opportunities.

An element of Donald Trump’s election campaign was his opposition to the Iran nuclear deal. He unilaterally insisted that the agreement go beyond nuclear weapons to the missiles that delivered them. 

Rather than using an incentive of further economic relations, he imposed significant sanctions on Iran and made their removal the incentive. 

In other words, where Obama sought not to weaken Iran economically but to focus entirely on the issue at hand, Trump chose to weaken Iran economically in order to expand the goals of the agreement to cover missiles.

Trump also sought to decrease Iran’s foreign operations, or at least increase the cost, by supporting a system of relations, beginning with Israel and the United Arab Emirates and expanding to other countries, that was designed to both isolate Iran and limit its ability to play off one Arab country against another. 

By the end of the Trump administration, the map of the region had shifted, and with it Iran’s position. Its economy was in steep decline, the hostility of the Arab world was consolidated, and the assumption was that between coalitions and economic costs, the Iranian political and military operations in the Arab world would decline, something not yet clearly visible. 

But economic weakness and a degree of political unrest in Iran are obvious.

Joe Biden ran against Trump’s Iran policy, as Trump had run against Obama’s. All of this gave the shift a political dimension. 

Trump favored the actions he took, but he also welcomed them as an attack on Obama’s position. Similarly, while we don’t have a clear sense of Biden’s strategy on Iran, he has a political imperative to reject Trump’s policy.

The Middle East is at the moment a radically different place than it was at Obama’s or Trump’s point of decision. The coalition that was formed had the American imprimatur, even if the mechanics of the creation were primarily in the hands of local powers. 

But now Biden must consider not only the nuclear deal and Iran but also the effects on the way in which recognition of Israel formed a coalition that even countries that have not formally recognized Israel are part of. 

The foundation of this organization arises from hostility to Iran, and the fear that when it reemerges, its power will swamp the region. Israel fears Iran’s nuclear weapons, the Saudis fear Iranian drones and Iranian proxies in Yemen, and so on. On the whole, these countries welcomed Trump’s revision of Obama’s approach for the reasons given.

The inclination of Biden, given the American political process, is to reinstitute Obama's strategy and repudiate Trump’s. 

But the problem is that a return to Obama’s strategy, with the withdrawal of sanctions, would reasonably quickly revive the Iranian economy, strengthen the Iranian hardliners who refused to bend in the face of Trump’s policy and would then be vindicated, and create a massive crisis in the Middle East.

There are those who would argue that the Abraham Accords are a house of cards unable to hold together. That may be true. But it is there now, and it is there because of Iran. 

A shift in U.S. policy on sanctions will be read in this region as the U.S. moving to a pro-Iran position, a view that might not be true but will appear to be the case. 

Israel will see it as a mistake, and the UAE and the rest of the Sunni world will argue that whatever the subjective intent of the Biden administration, the objective fact is that its policy is strengthening Iran. 

And as a result, the anti-Iran construct that is seen as American in its root will in fact fragment. And in a fragmenting Middle East, war is a frequent accompaniment.

Biden obviously doesn’t want this, and his pledge to resurrect Obama’s nuclear deal will pass. 

Consider that if Israel draws the conclusion that the Abraham system is of no importance and allows it to fragment, Israel will conclude that the management of the Iranian threat is solely an Israeli problem, and Israel strategically cannot allow the threat to evolve. 

The Saudis, who are facing the Iranians in many ways and who are being investigated by the Biden administration for human rights violations, will have to pick a new direction. It is not in the American interest to have allies (however distasteful to the current ideology) start choosing new directions. 

At the moment the region is relatively peaceful. If Iran were let out of its box without major concessions and controls, the region would go back to looking how it normally looks. And given Biden’s opposition to “America First,” instability there will draw the U.S. in.

Like every American president, Biden has his campaign position and then his governing position, just as the campaign advisers who were awarded senior positions find themselves more liability than asset. 

In any case, if he moves ahead to serious talks with Iran, the rest of the Middle East will be extremely frightened A U.S.-Iran entente – which is how it will be seen – is not compatible with a U.S.-Israel or U.S.-Arab alliance. Candidates may speak of things that become impossible in the light of victory. They get over it.

It may seem as if I am charting a history based on the whims of a president. But presidents are simply trapped by reality. Put another way, the U.S. sought to pacify the Middle East. 

One fear was Iranian nuclear weapons, and the first focus was on them. But the concern about Iran in the region went beyond nuclear weapons to other dimensions of Iranian power. 

The U.S. then generated a broader response, from sanctions to a regional coalition. But the coalition is fragile, and concerns about Iran’s nuclear program are still there. A return to the initial agreement is attractive, but since it will unleash other forces the U.S. doesn’t want to see, the problem becomes more complex.

The U.S. had to withdraw major military force from the region as the initial intervention failed to achieve its goals. But the U.S. can’t be indifferent to the region because it is a strategic part of Eurasia, and other great powers can take advantage of it. 

In the long run, it is easier to manipulate the region to American ends than to dislodge another major power, or face the emergence of a regional power destabilizing the region. 

And thus we see Israel and the Arab coalition. 

Speaking of presidents is a useful marker, but their policies are crafted by reality, not the other way around.