Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish

How the US savings glut could boost the services economy and sustain the expansion

Higher-income earners have pushed the savings rate to heights not seen since World War II, and Macro Strategist Juhi Dhawan sees reason to believe that once they begin spending, the economy could benefit for years to come.

The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

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.

FIGURE 1

Consumers' plans for their stimulus payments

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.

FIGURE 2

Lower-income households have been more likely to spend

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.

FIGURE 3

Putting the savings glut in historical perspective

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).

FIGURE 4

Services poised to close the gap with goods later this year

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).

FIGURE 5

Watching for a rebound in services spending

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.

Please refer to this important disclosure for more information.

Recommended for you

<em>Future Themes —</em><br> Tomorrow’s world today
For over 40 years, at each new business cycle, Wellington investors have been presented with a challenge: Look past current headlines to find structural trendlines that will shape markets, society, and the economy in the next five to 10 years.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
May 2021
Future Themes —
Tomorrow's world today
,
publish
US public debt: Is there a downgrade in the making?
US Macro Strategist Juhi Dhawan looks at the surging US debt through the lens of the credit rating agencies and offers thoughts on what it will take to avert a downgrade.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
April 2021
US public debt: Is there a downgrade in the making?
,
publish
APAC Investment Forum 2021
Wellington specialists offer their views on the key themes transforming the investment opportunity set today.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
March 2021
APAC Investment Forum 2021
,
publish
A new inflationary regime: Why the next decade could look different from the last
We explore why the risk of structurally higher inflation may be the highest it has been in decades and profile the key investment implications this presents.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
January 2021
A new inflationary regime: Why the next decade could look different from the last
,
publish
Four forces that could turn the tide for US financial stocks
US Macro Strategist Juhi Dhawan lays out a case for a better performing US financial sector, from attractive valuations to a steeper yield curve, as well as the role of Fed and fiscal policy in shaping the outcome.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
January 2021
Four forces that could turn the tide for US financial stocks
,
publish
Future Themes: What’s reshaping markets, economies, and society?
Science, society, sustainability, and systems. These structural forces are shaping our world. They're also our Future Themes research categories. Get a quick rundown of the specific areas of focus from Portfolio Manager Dáire Dunne.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
December 2020
Future Themes: What’s reshaping markets, economies, and society?
,
publish
2021 Investment Outlook
As we head into the new year, thought leaders from across our investment platform share their views on pressing questions.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
December 2020
2021 Investment Outlook
,
publish
Tomorrow’s world today: Introducing Future Themes
Long-term trends often go underappreciated by investors. By researching structural themes shaping our world, we believe we can identify attractive opportunities ahead of the market. Learn more about our Future Themes project from this year's lead sponsor, Portfolio Manager Dáire Dunne.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
December 2020
Tomorrow’s world today: Introducing Future Themes
,
publish