Savings Rate Hits Record amid Collapse in Spending, Stockpiling of Cash - June 1, 2020
The savings rate soared from an already-lofty 12.7% in March to a record 33.0% in April, as Americans continued to slam the brakes on spending. The prior record of 17.3% occurred in 1975. Monthly records for spending/income/savings began in 1959 (US BEA).
We understand why spending has collapsed. Many have sheltered at home. Businesses, where we might spend freely, have been closed. Therefore, consumer spending fell 13.6% in April, the biggest decline on record, eclipsing March’s record drop of 6.9%.
But how might income rise when layoffs have soared? The U.S. BEA not only counts wages and salaries, but it includes government payments, too.
Unemployment benefits partly offset the decline in wages, but government stimulus checks were mostly responsible for a record 10.5% surge in income.
Some have been spending stimulus checks on groceries and other necessities. But if we review overall income and spending, the annualized amount of savings available jumped from $2.1 trillion to $6.1 trillion.
Generous unemployment benefits will continue to flow to newly laid-off workers, while stimulus checks (for those who didn’t receive one in April) will slow, unless a new stimulus package that includes payments is passed by Congress.
What does this mean?
Government support for the economy and laid-off workers has helped boost income at a time when the transmission mechanism between consumers and businesses is broken. As businesses reopen, cash is available to spend.
How quickly spending patterns might resume is up for debate. Those who remain unemployed might take a more cautious stance. Others, who are flush with cash, may be more willing to increase outlays. Or, will some folks stay out of the public eye? Uncertainty reigns.
Ultimately, the success of state reopenings, the path of the virus, and the development of a vaccine will help determine the speed of any economic recovery.