The coronavirus crisis has Americans hoarding more money than ever before as widespread fear paralyzes consumer spending habits.
The swiftness and severity of economic recovery in the U.S. hinges on whether consumers continue to stockpile cash or start to spend again.
The personal savings rate hit a historic 33% in April, the U.S. Bureau of Economic Analysis said Friday. This rate — how much people save as a percentage of their disposable income — is by far the highest since the department started tracking in the 1960’s, and surpasses consumer savings during the Global Financial Crisis. April’s print is up from 12.7% in March.
“There is a tremendous uncertainty and virus fear that is lingering and that is restraining people’s desire to go out and spend as they normally would,” said Gregory Daco, chief U.S. economist at Oxford Economics.
The previous record savings rate was 17.3% in May 1975, according to FactSet. The savings rate was elevated above 13% throughout most of the early Seventies.
U.S. consumers have a glut of savings as the deadly coronavirus causes unprecedented economic and societal disruption. The deadly virus — which caused a government mandated shutdown of the economy — has caused more than 40 million Americans filing for unemployment since the virus was declared a pandemic.
“The saving rate is the residual of an extraordinary event,” Diane Swonk, chief economist at Grant Thornton told CNBC.
With the U.S. consumer accounting for more two-third of the economy, the speed and robustness of economic recovery depends on whether the increase in savings is a results of the shutdown or a more structural change in consumer habits, analysts tell CNBC.
‘Forced savings’
Saving during the Covid-19 pandemic is especially unique due to the shutdowns. Hundreds of thousands of small and large businesses shuttered their doors closed in an effort to curb the fast-spreading virus.
There is an aspect of “forced savings,” said Swonk.
“There’s not much opportunity for many people to go out and spend money,” Megan Greene, Senior Fellow at Harvard Kennedy School, told CNBC. “With shops all closed and everybody locked up, the ‘shopportunities’ have dried up. That speaks to a kind of demand shock.”
This is reflected in April’s personal spending rate, which plummeted by a record 13.6%.
On the other hand, a more structural change in saving and spending habits with “scarring” in consumers, can have intense repercussions for the economy. This occurred during the financial crisis, and can exasperate secular stagnation, which “keeps interest rates and growth and inflation all low for a long time,” said Greene.
“As long as the money is put in savings instead of being invested, then typically that tends to weigh on interest rates, it tends to curb growth and to weaken the potential of the economy,” added Daco.
During a crisis or a recession it is entirely rational for an individual to be more conservative with their spending and savings, Marc Odo, portfolio manager at Swan Global Investments, told CNBC.
“The paradox is that if everyone across the broad economy is hunkering down, that only makes the recession worse,” Odo added. “The Paradox of Thrift is a negative feedback loop. The more people save, the less they spend; the less they spend the worse the recession gets; the worse the recession gets the more they save.”
Consumer spending habits will play a large roll in whether the economy recovers in a “V” shape, a “W” shape or a “Swoosh” shape.
‘Pent up demand’
Bank of America — which touches half of American households — said checking accounts have 30% to 40% more money in them compared with 12 weeks, CEO Brian Moynihan told CNBC Thursday. But Moynihan is seeing a recovery in spending habits.
“That means that the stimulus is still in their accounts and its going to be spent. Part of it’s been spent but there’s more to come,” he said.
Ark Invest founder Cathie Wood, who manages $15 billion in assets for clients, said consumers will lead the economy out of this downturn, making up for the months they weren’t able to spend. This theory is consistent with V-shape recovery, where activity returns as fast as it evaporated.
“Sure there’s a lot of despair out there and really difficult stories, but if you look at the consumer as a whole, the consumer has this huge saving right now, and that, once the paralysis is done, that’s pent up demand waiting to be deployed,” Wood told CNBC.
Wood likens the current savings to the post-9/11 era, where consumers went through a brief period of “paralysis” after the attack, followed by a robust recovery in spending. During the SARS pandemic there was a big drop in retail sales but a year later, the data had completely recovered.
“So we actually think the market is beginning to understand this, that’s why we haven’t has the retest that most investors expected. What usually happens is a retest but it doesn’t look like we’re going back to the old lows. I think the market is seeing through to the other side of this cycle and trends in motion before the crisis will remain in motion, that means businesses will have to chase to keep up with consumers as they satisfy pent up demand,” said Wood.
Stocks have come way off their March lows on investor optimism about economy reopening and potential coronavirus vaccine. All 50 states have begun to reopen to some extent, two months after the pandemic thrust the country into lockdown.
Savings were increasing pre-covid-19
The savings rate was increasing, although less drastically, before the global pandemic.
This was largely driven by the elderly population, according to Swonk. Pre-Covid-19, Baby Boomers were pulling back on spending amid a surge in mortgage restructuring, meaning the older population was saving money each month and not spending.
“Baby Boomers are near or in retirement, which makes them more skiddish than they once would have been,” Swonk added.
Swonk expects this trend to continue in the post-Covid era, as boomers are some of the highest risk groups for contracting the virus.
“There’s no reason to think that baby boomers who are most at risk, in a world where the well is still covid-tainted, that they’ll drink from the well freely as consumers,” said Swonk. “There’s a reason to save more and they will.”
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— with reporting from CNBC’s John Schoen.