While millions of people could lose most or all of the $600 bonus in their weekly unemployment benefits, threatening to slow consumer spending and the nation’s economic recovery, one thing could help cushion the blow: Americans have been saving lots of money during the COVID-19 crisis.
The savings rate – the portion of monthly income that households are socking away – hit a record 33.5% in April before edging down to a still outsized 19% in June, Commerce Department figures show. Before the pandemic, Americans were squirreling away an average 7.5% of income.
“We’ve never had this much savings,” says Tom Porcelli, chief economist of RBC Capital Markets. “It’s uncharted territory.”
From March through June, the latest data available, U.S. households banked an additional $916 billion of their income above pre-COVID levels, according to Moody’s Analytics, a stash that will top $1 trillion when July figures are included.
Some of the reserves already have been spent: Consumer spending rose a record 8.5% in May and a healthy 5.6% in June.
But with the economy largely shut down, little has been spent on travel, dining out, movies and other services. At the same time, households have benefited from stimulus checks of $1,200 for individuals and $2,400 for married couples.
The cash stockpile should help bolster consumer outlays and the economy as a congressional impasse over a new stimulus package threatens the weekly $600 federal unemployment bonus, which expired at the end of last month. While Democrats want to extend the benefit into next year, Republicans prefer to cut it to $400.
Late last week, President Donald Trump signed an executive order to provide jobless workers $300 a week and called on states to kick in another $100, but the move could face legal challenges.
“Regardless of the fiscal package, arguably the biggest factor for the outlook is personal saving,” economist Michael Pearce of Capital Economics wrote in a note to clients.
The hefty cash reserves won’t help most of the tens of millions of workers who have lost their jobs amid the crisis, including many restaurant, hotel and retail employees. Such low-wage workers tend to spend the vast majority of their income, saving well under 5% in the first quarter, Moody’s figures show.
But higher-income households put away a much larger chunk of their earnings – about 15% in the first quarter and almost certainly a far higher share amid the pandemic. Likely benefiting from the biggest boost in savings are upper-middle-income Americans who mostly have held onto their jobs and whose income thresholds were low enough to qualify for the stimulus checks.
Here’s the rub: With COVID-19 spikes across the South and West leading many states to pause or roll back plans to reopen businesses recently, Americans are worried about the course of the economy and aren’t in much of a spending mood.
“People are saving because they don’t know what the future holds,” says Moody’s Chief Economist Mark Zandi. “They’re likely to be concerned that their job is safe.”
Plus, he says, with many businesses shuttered or running at reduced capacity, “they don’t know what to spend (their savings) on.”
Zandi doesn’t believe people will spend their cash hoards in earnest until “the coast is clear in the pandemic is over,” likely after a vaccine is widely available, possibly sometime next year.
But if the virus surges ebb and restrictions on businesses ease in coming months, Porcelli says, the massive cash trove “represents the ability of consumers to really ramp up spending.”
Pearce of Capital Economics believes such a scenario is likely, with new virus cases in the Sun Belt declining the past few weeks and some measures of economic activity, such as the number of restaurant diners, edging higher.
Porcelli predicts consumer spending will jump at a record 30% annual rate this quarter after plunging an unprecedented 34.6% the first three months of the year.
Anne Parducci, 59, a multimedia content producer who lives in Manhattan Beach, California, says she and her husband largely have stopped traveling, eating out and buying clothes during the pandemic. So they recently used their savings to add a $4,000 fence to their yard and plan to spend $30,000 on new bathroom shower tiles this fall.
“We have the extra cash,” she says. “We feel financially secure. And we have more time to focus on home improvement.”
