What does the term pent-up demand mean, and what does it have to do with today’s economy? N.C. State University economist Mike Walden answers.
“Actually, it’s a simple concept. It says that when the economy is bad, when people are worried about the economy, they’re probably not going to spend as much as they normally would and especially, especially they’re going to constrain their spending on big expensive items like homes, and vehicles, and furniture.
“However, while they’re being frugal and while they are resisting their desire to buy these things, they really are going against what their natural inclination is. So, they really have this demand — this desire to buy cars, and vehicles, and furniture — that’s kind of bottled up inside of them. Therefore, the idea is when the economy does rebound and we have an improvement in economic confidence, all that bottled up demand for these things is going to come bursting forward and you’re going to have a big explosion, at least for some time, in purchases of these big ticket items. And we’ve seen some of that this time around.
“Clearly the economy is not where we want it to be, but it has improved on trend over the last couple of years. And we’re seeing some of this pent-up demand, particularly for vehicles, coming forward. Vehicle purchases were way down, historically low during the recession, and they’ve come roaring back.
“But one area where we’ve not yet seen this … and I think this is really a big factor in why the economy is weak, is with homes. Typically we would have seen again this pent-up demand for homes that was not met during the recession come bursting forward, and we would have had by now a big increase in the buying of homes. We’ve not seen that, and I think until we see that we’re going to have a very modest economic recovery.”Category: Economic Perspective