Will Americans’ pandemic savings pool keep the economy going?
Editor’s note (January 12, 2022): This article has been updated with the December inflation figure
AMERICAN TAXATION largesse during the pandemic fueled not only economic growth but also a vibrant hip-hop niche. Over the past two years, musicians have released no less than 30 different songs referencing government stimulus checks, known as stimmies. “Yeah, check it out, I need a stimmy. S–J–I-double M–Yes, tell them, give me, ”Curtis Roach raps in a catchy track. The video appears to confirm the worst fears about how the money was spent. Mr. Roach fans himself with dollar bills and sprays them at parties. But closer listening reveals a conservative trend that would be the pride of repulsive financial planners. “Generational wealth is where it is… save a little for the rainy days on your back, never slack off. »
The question of how Americans have spent and, most importantly, saved money over the past two years weighs heavily on today’s economy. In the spring of 2020, when millions of people lost their jobs overnight, a reasonable guess was that personal finances would suffer. Instead, government aid, from stimuli to more generous unemployment benefits, has supported incomes. Also, as people stayed at home, their expenses fell well below normal levels.
The result was a piggy bank boom. Americans have racked up some $ 2.5 billion in additional savings over the pre-covid trend (see Chart 1). Higher-than-expected income accounts for two-thirds of the stock, while lower-than-expected spending accounts for the other third, according to calculations by The Economist.
This cash reserve could, in theory, form a pillar for the economy in the coming year as policymakers withdraw their support. As annual consumer price inflation peaks in four decades – reaching 7% in December – the Federal Reserve has signaled that it intends to raise interest rates soon. Some economists are forecasting up to four rate hikes this year. Fiscal policies are also increasingly parsimonious. Most of the top-ups expired in the fall. The Democratic Party’s inability to embrace President Joe Biden’s “Build Better” agenda so far will lead to further downturns.
Will the additional savings lessen the impact of all this political tightening? There are reasons to be skeptical. If the $ 2.5 billion were shared equally across the country, that would work out to about $ 7,500 for every American, more than the combined total of the three rounds of stimulus checks. In practice, the distribution is far from equal. In the decade leading up to covid-19, the richest 1% of Americans had, in total, roughly twice as much cash and check bank deposits as the bottom 50%. The pandemic has skewed that again: the richest 1% now have four times as much as the bottom half. Although the government has directed its aid to the poorest Americans, the ultra-rich have reaped far greater benefits, in large part thanks to soaring asset prices.
This is important in trying to assess the potential impact of excessive savings. The rich usually spend a small portion of their income. The extra money in their hands is more likely to go into investment accounts than grocery purchases.
Another drag may be the nature of the economic recovery. In an article published last year, Martin Beraja and Christian Wolf of the Massachusetts Institute of Technology showed that recoveries from recessions where spending cuts are focused on goods tend to be stronger than those with cuts focused on goods. Services. Pent-up demand for, say, smartphones can be unleashed during a flood. In contrast, demand for a beach vacation is coming back more slowly: vacationers can only be in one place at a time. This suggests that as the pandemic wears off, the flow of savings to services such as travel and entertainment may be slow.
A final concern is high inflation. It eats away at both wealth and income. Adjusted for rising prices, US wage growth turned sharply negative in the last half of the year. Likewise, the real value of savings seems a little less impressive given the drop in purchasing power.
The story doesn’t end there, however. Investigations by the Fed’s New York branch indicate that stimulus recipients saved about a third of the money and used another third to pay off their debts. This helps explain why household balance sheets are healthier today than before the pandemic, regardless of their income level (see graph 2). This gives them the flexibility to borrow and spend more.
It may already be happening. Consumer borrowing soared $ 40 billion in November, the highest on record, as credit card use skyrocketed. Some observers saw it as a sign that households were strapped for cash. Alex Lin of Bank of America disagrees. “An increase in credit card spending may be a function of greater re-engagement in the economy,” he says. “Americans like to use their credit cards to rack up points for travel or restaurants, and that’s not necessarily a sign of danger.”
The damage from inflation may also prove to be tolerable, especially if the Fed’s tightening, along with supply chain improvements, brings prices back under control. Wage growth has been strongest for low-income people, the group most vulnerable to a reduction in real purchasing power. In November, annual nominal wage growth for the bottom quartile of employees reached 5.1%, compared to 2.7% for the top quartile, according to the Atlanta Fed.
Overall, Americans saved about 6.9% of their income in November, less than the average of 7.4% in the five years before the pandemic. Yet that is exactly the right thing to see if some people are dipping into their savings surplus. This is also one of the main reasons why most forecasters believe the economy will grow by around 4% this year, a steady pace in the face of headwinds.
And this is barely grappling with the changes that the extra money has allowed for many recipients. In another hip-hop track, Reneé the Entertainer sings about a woman who splurged for a butt augmentation procedure: “She passed the stimmy / on the booty / in Miami.” Reneé, real name Mariah Pizarro, actually put her money to arguably more productive use. “I used them to get a more reliable vehicle,” she says. Although Ms. Pizarro dreams of a musical career, the car has so far facilitated a less glamorous occupation. This allows him to commute to work in an Amazon warehouse. ■
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This article appeared in the Finance and Economics section of the print edition under the title “La vie après stimmy”