As we all painfully know, the COVID-19 pandemic has crushed the US economy with over 24 million Americans still out of work and a record rash of businesses closing, which is only going to get worse. Yet the paradox is, the personal finances of many Americans have remained strong and in some ways have even improved.
A new poll from The Associated Press-NORC Center for Public Affairs Research found that 45% of Americans say they’re setting aside more money than usual. Some 26% are paying down debt faster than they were before the coronavirus pandemic. In total, about half of Americans say they’ve either saved more or paid down debt since the outbreak began.
The findings highlight the unique nature of the current crisis. Nearly $3 trillion in government aid in the form of direct payments, expanded jobless benefits and forgivable payroll loans helped cushion against the fastest economic downturn in American history. Meanwhile, health fears and mandated business closures prompted many Americans to spend less on restaurant meals, clothing, travel and other non-essentials.
About two-thirds say they’re spending less than usual during the pandemic. Since February, there has been a $1.3 trillion jump in money kept in checking accounts — a 56% increase according to the Federal Reserve. While the greater savings helps to keep families more financially secure, the downside is it also limits the scope of any economic recovery, especially in a country that relies so heavily on consumer spending for growth.
These findings shed light on a persistent riddle of a global pandemic in which a weakened economy has somehow spared most US families from the worst of the financial toll. Just 37% call the national economy “good,” down from 67% in January. But at the same time, 63% describe their personal financial situation as “good,” largely in line with what it was before the pandemic began more than six months ago.
Yet not everyone has it so good. About half of Americans say they’ve experienced at least one form of household income loss. That includes 23% who say they’ve experienced a household layoff, 34% who say someone in the household has been scheduled for fewer hours, 22% who’ve taken unpaid time off and 25% who’ve had their wages or salaries reduced.
The bottom line is, with two-thirds of Americans spending less, the economic recovery will be long and slow – especially if bankruptcies and business closures continue to rise as I expect.
US Personal Savings Rate Spiked as Never Before
The coronavirus crisis has Americans holding onto more money than ever as widespread fear paralyzes consumer spending habits. Plus, with much of the economy shut down in the spring, people had far fewer places to spend money, even if they were so inclined.
The personal savings rate surged to a historic high above 33% in April, the US Bureau of Economic Analysis reported in May. This rate — how much people save as a percentage of their disposable income — is by far the highest since the Labor Department started tracking it in the 1960s.
US consumer spending accounts for apprx. 70% of the economy (Gross Domestic Product). Thus, the swiftness and severity of the US economic recovery hinges on whether consumers continue to stockpile cash or start to spend again.
While the savings rate has come down since the eye-popping record in April, to 17.8% in July, it is still far above our historical norm. Here’s a closer look at it.
The previous record high in the personal savings rate was 17.3% in May 1975 at the tail end of a severe recession and two years of economic stagnation. It remains to be seen if the savings rate continued to fall in August.
While the unprecedented surge in the savings rate is a function of the unprecedented COVID-19 pandemic, it is also a function of the unprecedented government stimulus programs. As we all know, millions of American families received large initial stimulus checks from Uncle Sam, plus an extra $600 per week in their bank accounts for those who qualified — until this assistance program lapsed at the end of July.
Thus far, Congress is deadlocked on the issue of extending the lavish government stimulus programs. The point is, the US savings rate will continue to decline to more normal levels unless the previous government stimulus programs are extended.
The much bigger question is, when will Americans return to their normal spending habits? As noted above, two-thirds of Americans were spending less than usual in the April-July months. I think it’s safe to assume most families are continuing to spend less as the pandemic continues.
As a result, I believe it is also realistic to assume this will be a long, slow economic recovery.
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