By Matthew C. Klein
Nov. 2, 2020
The coronavirus has kept Americans home and pushed the federal government to distribute almost $1 trillion in income support. That’s led to a surge in spending on physical goods—especially cars, exercise equipment, and other durable goods—as well as home renovations.
But the combination of government checks and the threat of the virus has also been responsible for a massive increase in the household saving rate. While the boost is starting to fade, the cumulative impact has been worth about $1.3 trillion, and rising.
The big question now: What’s going to happen to all that money?
So far, the extra cash has likely contributed to the strong performance of financial and housing markets. But if consumers started spending this rainy-day stash on goods and services instead of speculating on assets, they could power an economic boom—or maybe even spark some modest inflation.
If household savings had grown in line with the recent prepandemic trend, Americans would have socked away about $2.2 trillion since the start of 2019. Instead, cumulative savings over that time period are worth just over $3.5 trillion. The difference—about $1.3 trillion—could pay for 9% of all the consumer spending that happened in 2019.
This savings boom had two basic causes.
First, Americans cut their consumption dramatically. Part of what happened was that the higher-income people who were most likely to keep their jobs while working at home were also the people most likely to slash their spending on virus-sensitive categories such as dinners out and trips to the dentist. They were effectively forced to save because it stopped being safe to go out. Meanwhile, companies borrowed aggressively to offset the decline in sales while the government borrowed to offset the decline in tax receipts and pay for additional unemployment and welfare benefits.
The net effect was that consumption spending fell almost 20% in the first wave of the pandemic, while disposable personal income—excluding all the programs associated with the Cares Act—fell by 5%. Even as incomes rebounded, consumption rebounded by less.
The second thing to appreciate is the sheer magnitude of the money disbursed through the Cares Act. According to the latest estimate from the Bureau of Economic Analysis, the Cares Act has boosted household income by about $144 billion each month on average since April, for a total of $865 billion.
While everyone’s individual experience differs, the aggregate amount of money sent out has been far larger than the total losses caused by pay cuts, layoffs, and business closures. Americans have earned about $420 billion less since February than if there had been no pandemic and if disposable personal income had continued to rise in line with its recent trend. That’s a big loss, but it’s dwarfed by the amount of money sent out by the government as enhanced unemployment benefits, “economic impact payments,” forgivable “paycheck protection program” loans, aid to hospitals, and forbearance on student debt.
Put this together and the personal saving rate ballooned in April and remains elevated to this day. All told, Americans saved a little more than 14% of their incomes in September, or about $209 billion. That’s income that wasn’t spent on goods, services, taxes, interest payments, donations, or fines, although it could have been put toward mortgage principal payments, 401(k) contributions, or brokerage accounts. Excluding the extra income provided by the Cares Act, the household saving rate was still effectively 10%, which is significantly higher than the 7.5% average that prevailed before the pandemic.
The striking fact is that the impact of the forced saving, heightened risk aversion, and the Cares Act dwarfed the impact of everything else. The total amount of household saving induced solely by the pandemic has been worth almost half a trillion dollars.
The surge in saving explains why the Cares Act money and the Federal Reserve’s lending programs haven’t led to higher consumer prices. Unfortunately, it probably also means that the extra money isn’t sitting around waiting to finance a consumption boom. At this point, much of the extra savings are likely held by higher-income people who are generally more interested in accumulating assets than buying more goods and services.
While the jobless and those on lower incomes had benefited from the spare cash in the spring and early summer, they’ve since been forced to dip into it when their benefits were slashed. A recent study from economists at the University of Chicago and the JPMorgan Chase Institute found that the unemployed have been able to maintain their living standards—so far—only by liquidating most of the savings buffers they had built up earlier in the year. That has helped prevent a sharp drop in consumer spending, but it’s also unsustainable—unless growth quickly accelerates and the tens of millions of unemployed and underemployed find good jobs.
Since the overall household saving rate remains elevated, the necessary implication is that other Americans are still saving even more than before. In theory, those better-off Americans could go on a spending splurge once the pandemic is definitively over, which would lead to a nice boost in jobs and incomes for everyone else. But the impact will likely be much smaller than the $1 trillion-plus implied from the recent monthly data.
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