Background
How is it possible that with the pandemic leading us into recession that we would see that COVID-19 drives up savings? We’ve seen the personal savings rate, what people make minus what they spend, hovering around 7-8% for several years. Yet the March data just released by the Bureau of Economic Analysis shows the savings rate jumping to 13.1%. How can this be?
Findings
- It’s because people stopped spending: Personal income was actually down 2%, or $382 billion, in March. But – personal spending was down 7.5% or $1.1 trillion. As people understood the virus risks, they stopped spending. Less spending means more money saved. In the short term, COVID-19 drives up savings.
- The biggest drop was health care spending: This may seem the strangest reduction. The news is constantly talking about hospitals taking in virus patients. Presumably people decided to avoid non-critical contact with health care professionals, including office and hospital visits. Spending dropped over $400B or 16%.
- Fun outside the home plummeted: Events – sports, museums, theater, and health clubs – saw a 45%/$106 B drop in spending. Gambling was down 33%/$54B as casinos were avoided.
- Forget travel and restaurants: We know these industries are being heavily impacted by virus worries. Food services were down 23%/$207 B. Accomodations, e.g. hotels, were down $68B/43%. Air transport was down $57B/54%.
- Cars can wait: New vehicle sales were down $87B/27% and gas spending was down $50B/16%. Uncertainty causes people to postpone purchases, and if you’re not driving as much you don’t spend as much on gas.
Implications
First, don’t think that seeing the savings rate up with coronavirus is a positive sign. People’s reduced spending means they were preparing for what they knew was coming. In April, unemployment claims are way up. Companies are reducing salaries. If people don’t, for example go to restaurants and sporting events, that means workers in those industries end up with little or no income. In other words, March was the consumer spending crash which pointed to the industries that will be hardest hit and therefore cut staff.
April data will look worse. Personal income will decline substantially. During the Depression in the 30’s, the savings rate went negative as the country reached a 25% unemployment rate. If we see a similar trend, look out. Americans will be postponing their underfunded retirement, but may not be able to find jobs.
I’ll be looking at the savings rate every month to understand the impact on consumers. Financial services firms will need to be flexible and understanding of their clients. This won’t be the time to scold people for not saving more for retirement.
The small print
The data is from the monthly Bureau of Economic Analysis’ Personal Income and Outlays report. The health care category incudes hospital and nursing home services (down $144B), physician services (down $128B).
Crisp, clear analysis—as always from you.