How An Increase In Savings Impacts The Economy
Historically, We’re Terrible Savers
The bottom 90 percent of households saved 10 percent of their income in the first Reagan administration. By 2006, their savings rate was nearly negative-10 percent. Nearly half of Americans would not be able to come up with $400 in savings in an emergency, according to a Federal Reserve study
America’s poor and its middle class live on the razor’s edge of financial security through their working years and are uniquely ill-prepared for retirement. The United States finished 19th for three consecutive years in a global analysis of retirement security, behind Australia, New Zealand, Japan, South Korea, Canada, and 13 European countries.
Theories Behind America’s Poor Saving Plans
1. Americans stopped saving when their incomes stopped growing.
2. The poor and middle class went into debt to buy houses.
3. U.S. policies make it easy to not save money.
All of these theories have valid arguments, yet also fail to address a more systemic problem with how the US operates. The stock market is inflated with large amounts of debt. Credit cards enable consumers to assume debt which in turn, results in cash flow now for companies with large amounts of debt of their own. Societally, we aren’t savers. That is until Covid-19.
Now things look like they might be changing and that could have major implications for upcoming earnings, government stimulus, and the broader economic recovery.
Covid-19 Has Changed Saving Habits
According to the U.S. Bureau of Economic Analysis, the personal savings rate hit a historic 33%, the metric represents how much people save as a percentage of their disposable income and is the highest since the department started tracking in the 1960s.
U.S. consumers have amassed savings as the global COVID-19 outbreak led to severe economic and societal disruption, which has resulted in more than 40 million Americans filing for unemployment.
What Impact Will That Have On The Economy?
Since the U.S. consumer accounts for more than 67% of the economy, the speed of economic recovery will be contingent on if saving is a result of the shutdown or a reflection of a structural change in consumer habits.
As many businesses are closed and people are staying home there are less opportunities to spend money. Conversely, as there is much uncertainty around the economy individuals tend to be more conservative with spending, which can make a recession worse since dollars aren’t being spent at businesses.
So Will Government Funded Stimulus Really Work?
It remains to be seen. The Fed Chair, Jerome Powell has already indicated that they do not anticipate cutting stimulus to businesses and reducing bond purchases anytime soon. Similarly, Democrats (and some Republicans) have advocated for a second round of $1,200 stimulus checks.
Republicans have advocated against any future checks, particularly Trump who has suddenly decided to cry for austerity from citizens and States. It remains to be seen if this stance will last when the additional $600/week unemployment checks run out, or if Trump is merely waiting until he can repackage the idea for himself.
(We’ll save the debate for whether sending $2,400 to every American constitutes buying votes for another article)
In either case, with such high savings rates, there is considerable weight to economists arguments that further stimulus without any qualifications will exacerbate wealth inequality. While low-income Americans are using stimulus checks to pay their bills, rich Americans aren’t taking vacations.
They’re putting the money into the stock market. Whether the valuations and Bull run make sense to them or not.
So basically:
Increased savings is going to undermine company’s short-term profitability and weaken the impact of additional stimulus on reinvigorating the economy. Unfortunately, lawmakers frequently equate the economy to the stock market. And the stock market will continue to climb despite adverse earnings if the government keeps printing money & holds interest rates at 0.
