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Will Americans’ pandemic savings keep the economy going?

January 15, 2022

Editor’s note (January 12, 2022): This article has been updated with the December inflation figures

ONEMERICA’s fiscal generosity during the pandemic fueled not only economic growth, but a vibrant hip-hop niche as well. In the past two years, musicians have released no fewer than 30 different songs related to the government’s business stimulus checks known as Voices. “Yes, check, I need a Stimmy. STI-double MY, tell them give me, ”raps Curtis Roach on a snappy track. The video seems to confirm worst fears about how the money was spent. Mr. Roach fans himself out with dollar bills and sprays them at parties. But if you listen more carefully, you will find a conservative streak that would make musty financial planners proud. “Generational wealth, that’s where it belongs … Save a little bit for those rainy days on your back, never easy.”

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How Americans have spent, and most importantly, saved money over the past two years, is at the heart of the economy today. In the spring of 2020, when millions lost their jobs overnight, it was believed that personal finances would suffer. Instead, government grants, from voting to more generous unemployment benefits, supported incomes. In addition, since people stayed at home, their expenses fell well below normal levels.

The result was a piggy bank boom. Americans have accumulated about $ 2.5 trillion in additional savings compared to the pre-Covid-19 trend (see Figure 1). According to calculations by The Economist, higher-than-expected incomes account for two-thirds of inventory levels, while lower-than-expected expenses account for the other third.

That cash supply could, in theory, be a pillar of the economy in the coming year as policymakers withdraw support. With annual consumer price inflation peaking for four decades – it hit 7% in December – the Federal Reserve has signaled that it intends to hike rates soon. Some economists expect up to four rate hikes this year. Financial policy is also becoming more economical. Many of the power charges expired in the fall. The Democrats’ past inability to pass President Joe Biden’s “Build Back Better” program will result in further cuts.

Will the additional savings mitigate the effects of all this policy tightening? There are reasons to be skeptical. If the $ 2.5 trillion were distributed evenly across the country, that would be about $ 7,500 for each American – more than the total of the three rounds of business stimulus checks. In practice, the distribution is far from being the same. In the decade before Covid-19, the richest 1% of Americans had around twice as much cash and bank deposits as the bottom 50%. The pandemic has skewed this further: the top 1% now has four times as much as the bottom half. Although the government directed aid to poorer Americans, the ultra-rich reaped far greater profits, thanks in large part to rising asset prices.

This is important when trying to gauge the potential impact of excess savings. The rich tend to spend a small percentage of their income. The extra money that is in their hands goes into investment accounts rather than grocery shopping.

Another damper could be the nature of the economic recovery. In a paper 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 services. A flood can clear up the need to catch up with smartphones, for example. In contrast, the demand for beach vacations is returning more slowly: vacationers can only stay in one place at a time. This suggests that as the pandemic wears off, the flow of savings in services such as travel and entertainment could be sluggish.

One final concern is high inflation. That eats up both wealth and income. Adjusted for price, wage growth in America turned sharply negative in the last half of the year. Likewise, given the lower purchasing power, the real value of the savings looks a little less impressive.

The story does not end there, however. Surveys by the New York Fed branch show that recipients of incentives saved about a third of the money and used another third to pay off debt. This explains why household balance sheets are healthier today than they were before the pandemic, regardless of their income level (see chart 2). This gives you the freedom to borrow and spend more.

This can already be done. Consumer borrowing increased $ 40 billion in November, the highest amount ever, as credit card usage skyrocketed. Some observers saw this as a sign that the budgets were short of cash. Bank of America’s Alex Lin disagrees. “An increase in credit card spending can be a function of greater reintegration into the economy,” he says. “Americans like to use their credit cards to earn points for trips or restaurants, and that isn’t necessarily a sign of danger.”

The inflationary damage can also prove bearable, especially if the tightening of the Fed and improvements in the supply chain bring prices back under control. Wage growth has been stronger for those with lower incomes who are most susceptible to a decline in real purchasing power. In November, nominal annual wage growth for the bottom quartile of the workforce reached 5.1%, compared with 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 7.4% average in the five years leading up to the pandemic. But that is exactly what should be seen when some people dive into their excess savings. It’s also a big reason why most forecasters believe the economy will grow about 4% this year, a robust pace given the headwinds.

And that is barely coping with the changes that the extra cash has made possible for many recipients. In another hip-hop track, Reneé the Entertainer sings about a woman who treats herself to an enlarged buttocks: “She lost the Stimmy / on the booty / in Miami.” Reneé, whose real name is Mariah Pizarro, actually has her money used for more productive use. “I used them to get a more reliable vehicle,” she says. Although Ms. Pizarro dreams of a music career, the car allows for a less glamorous occupation for the time being. With it, she can drive to work in an Amazon warehouse.

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This article appeared in the Finance & Economics section of the print edition under the heading “Life after Stimmy”

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