What Is Pent-Up Demand?
Pent-up demand refers to a situation where demand for a service or product is unusually strong. Economists generally use the term to describe the general public's return to consumerism following a period of decreased spending. The idea is that consumers tend to hold off making purchases during a recession, building up a backlog of demand that is unleashed when signs of a recovery emerge.
- Pent-up demand describes a rapid increase in demand for a service or product, usually following a period of subdued spending.
- Consumers tend to hold off making purchases during a recession, building up a backlog of demand that is unleashed when signs of a recovery emerge.
- Pent-up demand is especially evident with big-ticket, durable goods.
- Quite often, pent-up demand accelerates the economic recovery period immediately following an economic downturn.
Understanding Pent-Up Demand
Pent-up demand is often seen immediately following a recession or depression. When the economic climate is uncertain, consumers tend to hold off making purchases, opting instead, when possible, to build their savings.
On an aggregate level, demand is believed to never tail off. Consumers just sometimes prefer to defer making purchases during a recession until they get their finances back in order again and feel more confident that better times are ahead.
These characteristic delays in purchasing goods usually result in a backlog of demand being unleashed on the market when signs of a recovery emerge. 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. At this point, central banks will typically attempt to breathe life back into the economy by lowering interest rates and encouraging people to spend more, paving the way for all the pent-up demand that has accumulated to be unleashed.
Examples of Pent-Up Demand
A good example of this concept occurred in the early 1990s. A recession, caused in part by the savings and loan crisis, led to a sharp rise in unemployment. In the end, it was short-lived. By 1993, the economy was in recovery mode again, fueled by low-interest rates, cheap energy prices, and the desktop computer productivity boom.
Pent-up demand was less evident in the early 2000s recession that happened on the heels of the dot-com bust or during the Great Recession. Following the Great Recession, the economy took longer than usual to recover. The economic crisis was severe. Years of reckless spending weighed on purchasing power and access to credit—banks weren’t doling out loans because their balance sheets were in a mess and they had to pay down their debts.
Pent-up demand can be particularly rampant for durable goods. When economic times get tough, consumers tend to refrain from making expensive, big-ticket purchases such as vehicles, appliances, and other durable goods, instead opting to make what they have last longer—even if it requires extra maintenance and repairs.
This type of behavior may be triggered by fears of becoming unemployed, general liquidity constraints, and limited access to credit. In any case, the longer consumers wait on making such purchases, the stronger both the desire and need to replace becomes.
Recording Pent-Up Demand
It's not easy to accurately measure pent-up demand because it is a fairly inexact science. One method economists use to get a sense of pent-up demand is to look closely at the average age of durable goods stocks. When consumers hold off on purchases to replace cars, home appliances, and similar items, the average age of the stock of these goods increases.
The Bureau of Economic Analysis (BEA) 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.
The average age of durable goods owned by consumers began rising as the Great Recession hit and increased through 2012. The average age for more than half of the categories reported was higher in 2012 than its peak value from 1947 through 2006.
Pent-Up Demand: COVID-19
The COVID-19 crisis in 2020 provides a good example of pent-up demand. The average age of fixed assets and consumer goods increased relatively significantly during the 2019-2020 period compared with the earlier periods in the decade according to the BEA.
|Current Cost Average Age Fixed Assets and Consumer Durable Goods|
This provides an example of the concept of increasing deferrals on spending because of concern about the effect of the pandemic on employment and income.
Bureau of Economic Analysis. "Fixed Assets Accounts Tables," Accessed Oct. 27, 2021.