Background
As we entered the pandemic, people stopped spending and sat at home. Now that the country has largely reopened and people are getting out, what has this meant for their finances? We have already seen indications of increased spending. Are people really spending like it’s 2019 again?
Findings
- Spending is back: Personal consumption is at its highest level…ever. The BEA reports that in June spending was over $1.3 trillion – the highest month on record.
- Income is higher than its pre-pandemic level, most impacted by stimulus payments: March 2021 was the biggest distribution; about $400 billion in extra money flowed to individuals. A smaller but notable impact was that workers’ wages and salaries were up 4% vs. February of 2020. With unemployment dropping but still above pre-pandemic levels, something else is happening with worker pay (topic for a different post).
- The savings rate has regressed to about where it was pre-COVID: As stimulus fades and spending grows, the June savings rate was 9.4%. This is well down from the “cocooning” days of 2020. It’s only one percentage point higher than in February of 2020.
Implications
People aren’t spending like it’s 2019 – they’re spending more! Perhaps this is just making up for what they didn’t do in 2020 – buying cars, taking vacations. However, it appears that the panic saving of early 2020 is a distant memory. Experience with past recessions shows that Americans quickly forget the pain of financial pressure and jump back on the spending bandwagon. Extensive government stimulus appears to be doing what it was intended to do – drive spending to juice the economy.
The challenge is that Americans are returning to a savings rate that is unlikely to deliver the retirement that they desire. This may be a moment for financial advice that counsels moderation in the spending, while recognizing you can’t shut down the splurge. Of course, the numbers in this discussion are averages. This– hides big differences between struggling households that are underemployed, and white collar households that stayed employed and got extra money dropped in their wallets.
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The small print
This data is pretty straightforward and consistent, coming from the monthly Bureau of Economic Analysis release. Disposable income includes a range of categories that I didn’t discuss but also didn’t change much – income from assets (dividends, interest), rental income, business income. Consumption is a big category and will be evaluated more in the next post.