Tom Barkin

One notable feature of the COVID-19 downturn has been an extraordinary rise in the personal saving rate. It spiked to historic levels, from 8.3 percent in February to 33.6 percent in April. While it has come down since then, it is still elevated, at 14.1 percent as of August. That’s $1.1 trillion extra in people’s pockets at a time when the economy, and millions of workers, are struggling. 

Why have savings increased so dramatically? First, the shutdown of the economy meant certain forms of spending were largely unavailable. Even if they had wanted to, consumers couldn’t buy haircuts, elective surgeries or international vacations. Second, both job loss and concern over health risks created tremendous uncertainty. Consumers may well have chosen to save more money to help bridge to an uncertain future. Net, consumer spending dropped 6.1 percent from March to August versus the same period a year ago. We also saw a significant reduction of outstanding credit card balances. 

At the same time, consumers received extraordinary levels of government stimulus. Between March and August, at least $712 billion flowed into personal income as a result of COVID-19-related stimulus measures, including direct payments, enhanced unemployment insurance and PPP income to proprietors. These flows helped offset lost wages for furloughed and laid-off workers and lost revenue for small businesses that had to close temporarily. In April, when many economic impact payments were disbursed, total personal income grew 14.1 percent year over year, compared to an average of 3.9 percent year-over-year growth in January and February. 

When stimulus boosts income at the same time spending drops, naturally savings will rise. But the effects were uneven. The less fortunate received the great majority of the stimulus payments, but they tend to spend a greater percentage of what they make, as they are more likely to live paycheck to paycheck. Researchers found that, in April, the top income quartile accounted for 40 percent of the decline in consumer spending, and high-income spending has still not recovered. In contrast, as of September, low-income spending is exceeding pre-crisis levels.¹

As the saving rate grew, we also saw a significant shift in spending from services to goods. As of August, spending on goods was up 5.8 percent from a year ago, and sectors like residential, automotive and recreational equipment were booming. But with continuing health concerns and capacity limitations, services spending is still down 7.2 percent from a year ago. This is challenging the travel, restaurant and entertainment sectors, among others.

Will these increased savings, combined with pent-up demand, fuel consumption that can support the recovery in the coming months? No other spike on record matches the intensity of the current saving rate increase, but there is one other period in which we saw it increase dramatically — during World War II. Right before World War II, the personal saving rate averaged 5 percent. During the war it climbed upward, peaking in 1944 at 27.9 percent, then dropped rapidly. It fell to a three-year average of 7.4 percent from 1947 to 1949. Similar to today, government-imposed restrictions on consumption (both rations and the redirection of resources to the war effort) decreased consumer spending. After the war, pent-up demand lifted the recovery: $24.2 billion was added to consumer spending between 1945 and 1946.²

Could something like this happen again? If we get a vaccine or compelling virus treatment, could we see a trillion-dollar boost to the economy?  

Economic theory suggests we temper our optimism. There is a lot of research on how people behave after they receive windfalls. Asset-driven wealth, such as home price appreciation or stock market growth, doesn’t appear to increase spending very much, perhaps because those gains tend to be concentrated among those already wealthy and can be costly to liquidate. Tax transfers often increase spending more, especially for those at lower incomes, but the marginal propensity to consume tax windfalls is still only in the range of 40 percent. And, as I noted earlier, uncertainty matters. People tend to spend gradually to retirement and the higher the uncertainty, the higher the propensity to save. 

What does all of this mean for today? With service sector capacity still constrained, we should expect any spending to continue to focus on goods. That may mean a healthy holiday season. With additional stimulus not yet forthcoming, we should expect lower-income families to tap the savings they accrued through the stimulus. And if we get a vaccine, one has to imagine that higher-income individuals will want to take a trip or at least go out to a nice dinner.  

At the same time, we know that the wealthy are less likely to spend their savings, and one only has so many vacation days. In addition, service sector spending is historically steadier than spending on goods — missed haircuts or dental appointments or business trips are unlikely to be made up. In a recent Gallup poll, among Americans who are currently able to save money, 76 percent plan to keep adding to their savings in the next six months.³ So, while some resurgence is likely, it may well look a lot more like a steady path back to normal than like the celebration of V-J Day.