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Cumulatively, 25% of GDP has been spent by Congress to help Americans weather the pandemic. During the shutdown, governments stepped in to replace lost income and help individuals and families make ends meet. In the latest government package, passed in March 2021, the focus remained squarely on ailing consumers, with two-thirds of the stimulus aimed at low-and middle-income earners. Cash-strapped consumers at lower income levels are more likely to spend the money quickly and to spend it on necessities like food and rent rather than discretionary items.
Higher-income earners, meanwhile, have been building up savings, with two-thirds of total savings held by the highest quintile of earners. As I discuss in this note, the result is a historically high level of excess savings, which I expect will fuel a multiyear increase in services spending, benefiting industries such as health care, travel, and recreation.
A closer look at the spending and savings patterns
In thinking about the spending/saving intentions of US households, there are valuable insights in the New York Federal Reserve Bank’s Survey of Consumer Expectations (Figure 1). March survey readings suggested that consumers broadly expected to spend a quarter of their government payments, save 42%, and use the remaining third or so to pay down debt. This was similar to intentions shared in January, after the second round of checks. Unsurprisingly, spending plans were at their highest after the first round of checks, when the greatest proportion of the population was unemployed.
As Figure 2 shows, spending over the past year has been highest at the lower end of the income spectrum. Survey results confirm that lower-income households have spent as much as 20% of their government payments on essentials (versus 12% among higher-income consumers) and have been more likely to pay down debt. Higher-income consumers, meanwhile, have saved a larger percentage of their government payments. This consumer behavior makes sense given still-elevated levels of uncertainty and unemployment, as well as constrained spending opportunities under a partially reopened economy.
How significant are the savings? As of year-end 2020, there was US$1 trillion of excess savings in the US or roughly 7% of consumer spending. If we add on savings from the latest stimulus, the aggregate number could reach US$2 trillion or about 10% of GDP (14% of consumption).
Watching for the release of pent-up services demand
Looking ahead to the second half of the year, I expect to see economic activity normalizing, since a high percentage of the US population should be vaccinated and the job picture should be brighter. Against that backdrop, I think it is worth looking back at the period around World War II, when another notable savings glut emerged (Figure 3). In particular, I would note that the savings rate declined but stayed somewhat elevated for a period after the war.
Given that most of today’s savings are in the hands of the highest-income earners, whose marginal propensity to consume is much lower, I would expect a similar picture in the coming years, with the savings rate declining over a multiyear period. I think we could see the process begin around the middle of this year, as reopenings become more widespread and higher-income earners begin to spend more. The services sector is likely to be a beneficiary, as it gradually catches up with spending on goods (Figure 4).
It’s important to bear in mind that the nature of pent-up demand is different in services than in goods: A consumer can’t take two vacations or elect to undergo two surgeries at the same time. In other words, it will take time to spend the accumulated savings. But in the coming years, I would expect to see areas like recreation, leisure, and health care rebound from current low levels (Figure 5).
The good news for the economic expansion is that US household balance sheets were healthy coming into this pandemic-induced recession. The accumulation of substantial excess savings was another positive for the net worth of middle-and high-income households over the last year, along with gains in home and stock prices. This, along with government assistance for consumers, especially at the lower end of the income spectrum, offers a path for consumer spending to recover relatively quickly in coming years. Services, which bore the brunt of the shutdown, have room to catch up and grow at a healthy clip as leisure, entertainment, social activities, transportation, and health spending experience rising demand again.