The Big Idea
Saving up for sunny days
Stephen Stanley | March 12, 2021
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
With the pandemic receding and states beginning to relax restrictions on activity, the US is likely on the precipice of a violent increase in consumer spending. A stronger-than-anticipated rebound in labor markets and massive amounts of federal government largesse have pumped up household balance sheets in an unprecedented fashion. Quantifying the boost to household balance sheets offers insight into the potential magnitude of the coming rush in outlays.
Personal income and savings
The pandemic created a massive shock for households. Millions lost work or had their businesses limited by lockdowns, hitting income. Consumers also suddenly became unable or unwilling to spend on a variety of products, mainly services such as travel, spectator events and dining out.
The federal government quickly filled the income shortfall with the CARES Act, offering rebate checks and beefed-up unemployment insurance to households and forgivable PPP loans to small businesses. Personal income has consequently exceeded pre-pandemic readings in every month since April. Moreover, while the level of employment remains depressed, wage and salary income has fully recovered to pre-pandemic levels. This reflects a surge in hourly pay and hours worked as well as the fact that most of the lost jobs were lower-paying positions.
The renewed federal payments in January, with another round of rebate checks in the mail and supplemental unemployment benefits reinstated, pushed personal income to a new high. Additional payments from the recently passed $1.9 trillion Covid relief package will add even more firepower to household pocketbooks in the weeks to come.
With spending constrained, much of this windfall has gone into personal savings. The personal savings figures from the monthly Personal Income and Outlays report offer insight on the savings stockpile. If we take the average level of personal savings in the 12 months ended February 2020 as a benchmark for normal and then tally up the excess savings over the 11 months from March 2020 to January 2021, it works out to $1.83 trillion, which is roughly 1.5 years’ worth of pre-pandemic savings. Notably, that is 1.5 years’ worth of excess savings—on top of the normal path of savings.
Household balance sheets
The Federal Reserve released its quarterly Financial Accounts of the United States on Thursday. The latest data went through the end of 2020. The household balance sheet enjoyed a massive improvement. Assets surged by over $7 trillion in the fourth quarter of 2020, almost as large as the rebound in the second quarter. As usual, most of the gain stemmed from equities as stock portfolios jumped in value by $3 trillion and mutual fund shares by another trillion dollars. Real estate holdings appreciated by roughly $1 trillion as well.
As a result, household net worth surged by nearly $7 trillion to $130.2 trillion, up from $118.2 trillion at the end of 2019. That is a $12 trillion, or 10%, surge in just one year, and it was the worst year for the U.S. economy since the Great Depression.
Household liquid assets
From the standpoint of consumer spending, the appreciation in stocks and homes is relevant, but the wealth effect is modest. The rule of thumb historically was that households spend about a nickel of every dollar in wealth gain and hold on to the rest. After the experience of the Great Financial Crisis, the figure could be even lower. While the added wealth is supportive, it will have only a modest impact on spending.
Meanwhile, we have seen an unprecedented accumulation of liquid assets over the past year, the mirror image of the excess savings discussed above. Households as of December 31 held $3.2 trillion in checkable deposits and currency, a $2 trillion increase from the end of 2019. Add in another $600 billion in higher time and savings deposit holdings and a $200 billion rise in money market fund shares, and households have built their liquid asset holdings from $13.65 trillion at the end of 2019 to $16.49 trillion at the end of last year, a $2.85 trillion increase.
Add in another round of rebate checks, mostly saved, in January, and the larger round of payments now on the way, as well as renewed supplemental unemployment benefits, and an array of new funds approved this week, including a beefed-up child tax credit, and one can imagine that the stockpile of liquid assets could rise by another $1 trillion or more in the current quarter.
When the economy opens up and fully vaccinated people start planning vacations, nice dinners out and tickets to a ballgame or a concert, they will have a massive pile of assets from which to pay for the rise in spending.
When Treasury yields backed up in February and early March, discussion immediately turned to the inevitable question of when it might begin to dampen economic growth. Many market participants were expecting Chair Powell to signal some new initiative or at a minimum some jawboning to push long-end yields back down. However, Powell and other Fed officials seemed strangely apathetic. They argued that the backup reflected an upgrade in the economic outlook of market participants, a view that they clearly agreed with.
The argument should go a step further. With households sitting on such a huge stockpile of dry powder—and businesses similarly flush after having borrowed heavily at rock-bottom rates over the past year—the economy is likely to be less affected by a rise in rates than it normally would because consumers are not going to need to borrow to spend. With the possible exception of housing, where almost all buyers will still need mortgages, a substantial backup in long-end rates should exert far less of a damper on the economy than would have been the case in prior business cycles. The Fed and the rest of us probably have far less to fear from a sharp rise in yields than might be generally presumed.