In spite of the pandemic and recession, US consumers will have an impressive stockpile of cash ready to use. What’s surprising is that household savings generally do not increase during a recession. Net household incomes often fall as pay and/or benefits decline and breadwinners are subject to losing their jobs. Savings are then consumed and debts increase. So then, why is it different this time?
Impending Spending Boom: At the end of WWII, a major economic boom occurred fueled by consumers who had money saved, but had been unable to spend it owing to wartime restrictions and rationing. The government’s solution to the economic problems created by the lockdowns used to fight the pandemic has resulted in cash buildups in the hands of consumers. The one event that could derail a spending boom as the pandemic winds down would be the danger of another pandemic surge, but as this country continues to get vaccinated, that danger is slowly subsiding.
Social Support Systems: To lessen the pandemic’s economic impact, the world’s richer countries have spent as much as 5% of their corresponding GDP’s on social support systems such as unemployment benefits, furlough schemes, and stimulus payments. This has helped prevent household incomes from falling. Generous fiscal stimulus by the US government, especially unemployment benefits in excess of the various state’s expenditures, have led in some cases to lower income households having a greater percentage of excess savings versus their incomes. Owing to lockdowns consumers are not always able to spend their discretionary income.
Impact on GDP: If the entire amount of surplus cash were to be spent forthwith, it could mean a 10% jump in collective GDP for these rich economies. In the US, the amount of excess savings (savings in excess of economic forecasts) could exceed 10% of GDP. JPMorgan Chase suggests that consumption in the rich countries could return to pre-pandemic levels in a few months, and if so, that would power a strong recovery. Goldman Sachs believes that in the US, consumption from the spending of excess savings could add two percentage points to GDP for the year following the full reopening. Other economists point to household savings as being “pent-up demand”.
Inflation Effect: But wouldn’t the sudden spending of all that excess savings likely touch off a significant round of inflation? Economists are predicting that only a nominal amount of inflation will occur and that the impact should be temporary. This would serve to indicate that the rise in consumption would likely be substantially less than the full amount of cash available, and might take place over a longer period of time. Portions of this savings glut might be used by consumers to pay down credit card balances or other short-term loans rather than all going to new expenditures.
Wealth Versus Income: The post-pandemic consumption factor could also be impacted by the distribution of savings among households, as well as the determination if the excess savings should be considered either wealth or extra income. Generally speaking, savings as a result of an increase in income is more likely to be spent than savings as a result of an increase in wealth such as the increased value of a home. This can vary from richer households versus poorer ones and from country to country throughout the rich world. It is more likely to see excess savings from richer households find its way into investments, whereas the poorer households are more likely to spend it.
Conclusions: The pandemic and ensuing recession has brought some unusual economic consequences for developed countries. In countries that have substantial social safety nets, household excess savings has been on the rise. Another factor supporting this increase has been lockdowns, designed to combat the spread of the disease, but also inhibit spending. The pent-up demand from lock downs should likely bring about a spending boom.
Sources: The Economist, The $3trn Question, March 13, 2021.