What Is Pent Up Demand?
Pent up demand refers to a situation when 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.
- 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 recovery emerge.
- 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 purchasing goods usually result in a backlog of demand being unleashed on the market when signs of 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. Once a recovery starts, rates for consumer saving dips below normal levels as pent up demand is released and consumers spend more.
Examples of Pent Up Demand
A good example of this concept in action happened 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, fuelled 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 accessibility 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 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.
Recording 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 is to look closely at the average age of durable goods stocks.
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.