What is Pent Up Demand
Pent up demand is when the demand for a service or product is unusually strong. Pent up demand is used by economists to describe the general public's strong return to consumerism following a period of decreased spending.
BREAKING DOWN Pent Up Demand
Pent up demand is often seen immediately following a recession or depression, where consumers have built their savings or held off on purchases due an the uncertain economic climate. Quite often, pent up demand accelerates the economic recovery period immediately following an economic downturn thanks to a sudden increase in consumer confidence and spending.
In a conventional economic cycle, pent up demand builds during recessions alongside high rates of consumers saving money. Once a recovery starts, rates for consumer saving dips below normal levels as pent up demand is released and consumers spend more. A good example of this concept in action happened in the early 1990s, but not the early 2000s recession that happened on the heels of the dot-com bust or during The Great Recession.
Although it had elements of the previous two recessions, The Great Recession was more severe. While demand was spent up going into the recession as a result of the housing bubble, the recession was so severe that not only was the pent up demand worked off, but significant demand was also built.
Pent up demand is quite apparent when it comes to durable goods. When economic times get tough, consumers hold off on purchasing vehicles, appliances, and other durable goods, instead opting to make what they have last longer – even if it requires extra maintenance and repairs. The longer consumers wait on making such purchases, the stronger both the desire and need to replace becomes.
Measuring Pent Up Demand
It's not easy to accurately measure pent up demand because it is a fairly inexact science. However, one method economists use to get a sense of pent up demand for durable goods is to look closely at the average age of durable goods stocks. The Bureau of Economic Analysis publishes year-end estimates of average ages, based on consumption and depreciation patterns for several types of durable goods. Average ages are generally stable over time, at least from 1960 to about 2007. For the majority of durable goods, the average age of durable goods owned by consumers began rising as The Great Recession hit and increased through 2012, the latest data available. The average age for more than half of the categories reported was higher in 2012 than its peak value from 1947 through 2006.