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Cumulatively, 25% of GDP has been spent by Congress to help Americans weather the pandemic. During the shutdown, governments stepped in to replace lost income and help individuals and families make ends meet. In the latest government package, passed in March 2021, the focus remained squarely on ailing consumers, with two-thirds of the stimulus aimed at low- and middle-income earners. Cash-strapped consumers at lower income levels are more likely to spend the money quickly and to spend it on necessities such as food and rent rather than on discretionary items.

Higher-income earners, meanwhile, have been building up savings, with two-thirds of total savings held by the highest quintile of earners. As I discuss in this note, the result is a historically high level of excess savings, which I expect will fuel a multiyear increase in services spending, benefiting industries such as healthcare, travel, and recreation.


A Closer Look at the Spending and Savings Patterns

In thinking about the spending/saving intentions of US households, there are valuable insights in the New York Federal Reserve Bank’s Survey of Consumer Expectations (FIGURE 1). March survey readings suggested that consumers broadly expected to spend a quarter of their government payments, save 42%, and use the remaining third or so to pay down debt. This was similar to intentions shared in January, after the second round of checks. Unsurprisingly, spending plans were at their highest after the first round of checks, when the greatest proportion of the population was unemployed.



Consumers' Plans For Their Stimulus Payments

Source: Olivier Armantier, Leo Goldman, Gizem Koşar, and Wilbert van der Klaauw, “An Update on How Households Are Using Stimulus Checks,” Federal Reserve Bank of New York Liberty Street Economics, 4/7/21. Based on responses to June 2020 special Survey of Consumer Expectations and January and March 2021 Core Survey of Consumer Expectations.

As FIGURE 2 shows, spending over the past year has been highest at the lower end of the income spectrum. Survey results confirm that lower-income households have spent as much as 20% of their government payments on essentials (vs. 12% among higher-income consumers) and have been more likely to pay down debt. Meanwhile, higher-income consumers have saved a larger percentage of their government payments. This consumer behavior makes sense given still-elevated levels of uncertainty and unemployment, as well as constrained spending opportunities under a partially reopened economy.


Lower-Income Households Have Been More Likely to Spend
Credit- and debit-card spending, % change from January 2020

Card spending (credit and debit) percentage difference from baseline (January 2020), seasonally adjusted. Daily data as of 3/26/21; last updated on 4/16/21. Sources: Affinity Solutions, Opportunity Insights.

How significant are the savings? As of year-end 2020, there was US$1 trillion of excess savings in the US or roughly 7% of consumer spending. If we add on savings from the latest stimulus, the aggregate number could reach US$2 trillion or about 10% of GDP (14% of consumption).


Watching for the Release of Pent-Up Services Demand 

Looking ahead to the second half of the year, I expect to see economic activity normalizing, since a higher percentage of the US population should be vaccinated and the job picture should be brighter. Against that backdrop, I think it’s worth looking back at the period around World War II, when another notable savings glut emerged (FIGURE 3). In particular, I would note that the savings rate declined but stayed somewhat elevated for a period after the war.


Putting the Savings Glut in Historical Perspective
Personal savings rate, %

Annual data as of 2020. Last updated 3/21. Source: Bureau of Economic Analysis.

Current high savings rates could decline as reopenings become more widespread and higher-income earners begin to spend more.

Given that most of today’s savings are in the hands of the highest-income earners, whose marginal propensity to consume is much lower, I would expect a similar picture in the coming years, with the savings rate declining over a multiyear period. I think we could see the process begin around the middle of this year, as reopenings become more widespread and higher-income earners begin to spend more. The services sector is likely to be a beneficiary, as it gradually catches up with spending on goods (FIGURE 4).


Services Poised to Close the Gap With Goods Later This Year
% year-over-year changes, 3-month moving average

Monthly data as of 3/21. Percentage year-over-year change. Billions of current dollars. Source: Bureau of Economic Analysis.

It’s important to bear in mind that the nature of pent-up demand is different in services than in goods: A consumer can’t take two vacations or elect to undergo two surgeries at the same time. In other words, it will take time to spend the accumulated savings. But in the coming years, I would expect to see areas such as recreation, leisure, and healthcare rebound from current low levels (FIGURE 5).


Watching for a Rebound in Services Spending
Credit- and debit-card spending, % change from January 2020

Card spending (credit and debit) percentage difference from baseline (January 2020), seasonally adjusted. Daily data as of 3/26/21; last updated on 4/16/21. Sources: Affinity Solutions, Opportunity Insights.

The good news for the economic expansion is that US household balance sheets were healthy coming into this pandemic-induced recession. The accumulation of substantial excess savings was another positive for the net worth of middle- and high-income households over the last year, along with gains in home and stock prices. This, along with government assistance for consumers, especially at the lower end of the income spectrum, offers a path for consumer spending to recover relatively quickly in coming years. Services, which bore the brunt of the shutdown, have room to catch up and grow at a healthy clip as leisure, entertainment, social activities, transportation, and health spending experience rising demand again.

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The views expressed herein are those of Wellington Management, are for informational purposes only, and are subject to change based on prevailing market, economic, and other conditions. The views expressed may not reflect the opinions of Hartford Funds or any other sub-adviser to our funds. They should not be construed as research or investment advice nor should they be considered an offer or solicitation to buy or sell any security. This information is current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.


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