The cost of the COVID-19 crisis: Lockdowns, macroeconomic expectations, and consumer spending

Olivier Coibion, Yuriy Gorodnichenko, Michael Weber 12 May 2020



Baldwin and Weder di Mauro (2020) provide an excellent overview of the recent policy trade-offs and open questions policymakers are facing as a result of the COVID-19 pandemic. Apart from a myriad of excruciating ethical choices, making policy decisions is particularly difficult in the current environment because policymakers and the public have only limited information on the scale of the economic calamity as well as the economic cost of lockdowns.

Using several waves of a customised survey on all households participating in the Kilts Nielsen Consumer Panel (KNCP) that elicit beliefs, employment status, spending, and portfolio allocations both before and during the COVID-19 crisis, we are able to provide new real-time estimates on the changing economic landscape and identify the role of lockdown policies in contributing to the downturn. In Coibion et al. (2020b), we report aggregate statistics across survey waves to suggest how the arrival of COVID-19 affected spending patterns and expectations on average between the pre-crisis wave in January 2020 and April 2020. Consistent with earlier work (Bick and Blandin 2020, Coibion et al. 2020a) documenting a sharp decline in employment, we find that consumer spending for a typical US household dropped by $1,000 per month between January and April, which corresponds to a 31% drop in overall spending. Strikingly, we find one of the largest drops occurring for debt payments such as mortgages, student, and auto loans. This result highlights the possibility of a wave of defaults over the next few months, which could ultimately affect the financial system, slow the economic recovery, and explain the recent increase in loan provisions by major US banks. Households also spent substantially less on discretionary expenses (such as transportation, travel, recreation, entertainment, clothing, and housing-related expenses) and decreased their planned spending on durables, with an average drop in spending on durables of almost $1,000, consistent with evidence by Carvalho et al. (2020) and Chronopoulos et al. (2020).

In line with these negative outcomes at the individual level, households’ macroeconomic expectations have become far more pessimistic. Average perceptions of the current unemployment rate increased by 11 percentage points, with similar magnitudes for expectations of unemployment one year from now. Unemployment expectations over the next three to five years also increased, indicating that households expect the downturn to have persistently negative effects on the labour market in accordance with increased anxiety (see Fetzer at al. 2020). Consistent with this view, inflation expectations over the next twelve months dropped sharply on average while uncertainty increased. Current mortgage rate perceptions as well as expectations for the end of 2021 dropped on average by about 0.4 percentage points, with even larger drops in average expectations over the next five to ten years. Hence, the pandemic has resulted in a level shift in the term structure of mortgage rates. The negative effect on long-run expectations suggests that the lower bound on nominal interest rates might be a binding constraint for monetary policy makers for the foreseeable future. Increased uncertainty at the household level and the large drop in planned spending point toward some form of liquidity insurance to curb the desire for precautionary spending and stimulate demand once local lockdowns are lifted (D’Acunto et al. 2020).

To assess the economic damage that households attribute to the virus, we elicited information on the perceived financial situation of the survey participants and possible losses due to the coronavirus, in both income and wealth. Among employed respondents, 42% reported having lost earnings due to the virus, with the average loss exceeding $5,000. More than 50% of households with significant financial wealth reported having lost wealth due to the virus, with an average wealth loss of $33,000. This drop in wealth is putting further downward pressure on future consumption.

In short, we are able to document and quantify the dramatic job loss and declining household spending and wealth following the COVID crisis. How much have lockdown policies contributed to this economic calamity? To answer this question, we compare economic outcomes for households in counties with lockdowns to households in counties without lockdowns. We instrument lockdowns with a dummy variable indicating if the county has any confirmed COVID cases. Our identification exploits the heterogeneous timing of when the first COVID cases were identified in different counties and the fact that most lockdowns occur when only a handful of COVID cases are reported in a location (Figure 1), which is largely random. We find that individuals living in counties currently under lockdown are 2.8 percentage points less likely to be employed, have a 1.9 percentage point lower labour-force participation, and are 2.4 percentage points more likely to be unemployed. These results imply that lockdowns account for close to 60% of the decline in the employment to population ratio.

Figure 1 Evolution of COVID-19 cases and lockdowns over time


To analyse how lockdowns affect aggregate demand, we study changes in the spending patterns of survey participants from January to April. We find that households under lockdown spend on average 31% less than other households, although the magnitudes of the decline vary dramatically across spending categories. At the extensive margin, respondents under lockdown are less likely to purchase larger ticket items in the next 12 months and, even if they plan to do so, they expect to spend almost 26% less. Taken together, these results indicate a persistent drop in future aggregate demand, reflecting lower expected income, heightened uncertainty, and supply restrictions.

We then study the effect of lockdowns on subjective expectations. First, survey participants under lockdown expect 0.5 percentage points lower inflation over the next 12 months, which might in part explain the depressed spending response of households. Consistent with the idea that the impact of the pandemic on inflation is not clear, we find that the individual-level uncertainty about future expected inflation increases by more than 0.6 percentage points. Second, we analyse the effect on the expected unemployment rate at different horizons. The pandemic increases current unemployment estimates by a staggering 13.8 percentage points, expectations for the unemployment rate in one year increase by 13 percentage points, and long-run expectations over the next three to five years are on average still 2.4 percentage points higher. These results indicate that, at least through the lens of households, a V-shaped recovery might be unlikely. Moreover, given the expected duration of heightened unemployment, these results could warrant an extension of unemployment insurance benefits to ensure no sharp drop in demand once claims expire. Third, we look at the effect on mortgage rate expectations, which are a central transmission mechanism from monetary policy to household consumption. The COVID-19 pandemic results in current mortgage rate perceptions that are 0.7 percentage points lower, with even larger effects over the next five to ten years.

In summary, we find that the declines in employment and spending can be largely attributed to lockdowns rather than to the share of the population infected by the coronavirus. We cannot establish whether this economic cost is sufficiently small to justify lockdown policies that likely save many thousands of lives. However, our analysis should inform policymakers about at least one part of the trade-off they face, because these costs are relevant in thinking about how long to maintain lockdown policies, especially since the costs are likely increasing with duration. The significant costs that we identify suggest that policymakers should be wary of focusing only on the benefits of lockdown policies and not carefully weighing them against their costs. Our analysis should also provide input for policies aimed at mitigating the consequences of the COVID recession. For example, we document that many households effectively default on their debt payments and rents which may start a wave of bankruptcies and evictions and thus delay the recovery. Low expectations for inflation and mortgage interest rates will likely limit the power of monetary policy. While households expect normalcy to return within six months, the ferocity and speed of this storm is such that the damage may be persistent. To avoid adverse hysteresis-like scenarios, policymakers may have to consider less conventional measures such as extended periods of fiscal stimulus, debt forgiveness, taking stakes in businesses (including financial institutions), and more aggressive quantitative easing.


Baldwin, R and B Weder di Mauro (2020), “Economics in the time of COVID-19: A new eBook”,, 6 March.

Bick, A and A Blandin 2020, “Real-time labour market estimates during the 2020 coronavirus outbreak”,, 6 May.

Carlvalho, V, J R Garcia, S Hansen, A Ortiz, T Rodrigo, J V Rodriguez Mora and P Ruiz (2020), “Tracking the COVID-19 crisis through the lens of 1.4 billion transactions”,, 27 April.

Chronopoulos, D K, M Lukas and J O S Wilson (2020), “Real-time consumer spending responses to the COVID-19 crisis and government lockdown”,, 6 May.

Coibion, O, Y Gorodnichenko and M Weber (2020a), “Labor Markets During the COVID-19 Crisis: A Preliminary View”, NBER Working Paper w27017.

Coibion, O, Y Gorodnichenko and M Weber (2020b), “The Cost of the COVID-19 Crisis: Lockdowns, Macroeconomic Expectations, and Consumer Spending”, BFI Working Paper 2020-60.

D’Acunto, F, T Rauter, C Scheuch and M Weber (2020), “Perceived Precautionary Savings Motives: Evidence from FinTech”, NBER Working Paper 26817.

Fetzer, T, L Hensel, J Hermle and C Roth (2020), “Coronavirus perceptions and economic anxiety”,, 21 March.



Topics:  Covid-19 Labour markets Macroeconomic policy

Tags:  COVID-19, macroeconomic policy, Labour Markets, unemployment, inflation, spending

Associate Professor, UT Austin

Quantedge Presidential Professor, Department of Economics, University of California – Berkeley

Associate Professor of Finance, University of Chicago Booth School of Business


CEPR Policy Research