A question I’ve been pondering for a while now: Are we as a country saving or spending? Because it’s honestly hard to tell at this point.
The savings rate jumped up at the start of the pandemic. And we’re now being told that Americans’ savings rate jumped to a historic 33% in April.
This has sent many economists into a lather, saying that people not spending would be the start of a huge recession, if not a full-on depression. People were essentially being criticized for doing the smart thing, even as experts agreed that it was understandable and perhaps even a good idea.
Yet at the same time we’re being told now that 23% of people with credit card debt have seen it rise and that credit card usage has risen substantially at grocery stores and restaurants.
But we also heard that in April credit card debt had dropped by an annual rate of 31%. At the same time, the savings rate had gone from 8% to 13.1% — the highest it’s been in 39 years.
So which is it? Are we saving or spending?
Timing is key
Well, part of the answer is probably that these things progress. The article about an increase in the savings rate/drop in credit card debt was based on March results. That’s back before most lockdowns began, when people were just readying their finances for the hit of unemployment or underemployment.
By the time the surveys showing an increase in credit card debt were done, Americans’ finances had finally been affected. Many were out of work and unemployment may not have come in, but the bills kept coming. So a fair number of people seem to have put things on credit cards, raising their balances.
Majority vs minority
And of course, it’s worth noting that 23% is hardly the majority when it comes to credit card debt increasing. There were still plenty of people employed during that time. In fact, “only” 30% saw a decrease in income. Yes, 30% is a lot — hence the quotation marks — but it’s still far from the majority.
As for those 30%, at least some of them may simply have managed their lowered incomes so that they didn’t put anything extra on the card.
For example, 19% of people in that last survey have less in emergency savings than they did before the pandemic. In other words, some people are dipping into their bank accounts to cover bills. In those cases, credit card debt wouldn’t rise because the money is coming out of savings.
And we can’t discount the stimulus when it comes to the savings rate. Many checks were issued in April, and a lot of people (the ones who didn’t need it to pay bills, anyway) put the money into the bank. That $1,200 in extra savings would be a big boost to the savings rate. So experts are saying that the historic savings rate in April is probably a one-off.
The real interesting question is where things go from here now that states are reopening. Will people’s income be fully restored? Or are restaurants’ and stores’ capacity restrictions going to decrease the number of employees needed or provide vastly reduced hours? Not to mention all of the businesses that closed their doors for good. Both those factors mean that a fair number of jobs may not come back — or at least aren’t back full-time.
And even if people’s income is restored, how many who endured a month or more of financial uncertainty are going to go back to previous spending levels?
The experts are predicting that spending will rise again. They think that the drop in spending was more due to a lack of opportunity — what with people being stuck at home — than newfound thriftiness.
Saving out of fear
My guess is that people are going to use their restored incomes or the boost in unemployment payments to save. I don’t think they’re overly worried about stimulating the economy when there’s still so much uncertainty. Especially people who saw their savings drop or who haven’t recovered their jobs.
Then again, I’m told that bars and restaurants are seeing plenty of packed houses. And let’s not even get into Memorial Day at various lakes and beaches. So maybe a lot of people plan to return to life as usual.
That said, if I’m right and those actions mean that the predicted second wave of the pandemic comes long before the fall — what with so many people refusing the wear masks — it’s going to be scary. And when people are scared or uncertain, they hoard cash.
And isn’t that the smart thing to do? Well, yes and no, I suppose.
Individual vs society
Saving is the smart thing for the individual… Right up until a recession (or even depression) is triggered by a lack of spending.
Let’s not forget that more than 2/3 of the economy is based on consumer spending. So in trying to save for a recession, people may trigger the very thing they’re afraid of. This could lead to job loss, inflation, etc. Meaning that the individual, in trying to make themselves financially secure enough to weather a recession, instigates and has to suffer through the very thing they were most afraid of.
That said, I’m hard-pressed to tell people not to save when their financial futures are so uncertain. You need savings to weather a recession/depression, and honestly given how scary this all is, I don’t see any future in which at least some level of recession doesn’t take place.
Too many small businesses have failed or will fail, like restaurants who can’t get enough customers in to pay the employees who have to be there. This means layoffs and maybe the restaurant even going out of business. And large businesses have also been calling it quits: Neiman Marcus, Pier 1 Imports, etc.
So how do you tell someone not to save for a probably-inevitable recession on the off-chance that they can help avoid it? You don’t. Because that’d be bad advice, even though saving is similarly bad advice for the economy as a whole.
But what do I know?
Of course, I’m not an economist. So perhaps my doom and gloom forecasts are wrong.
Target, Walmart and Amazon have seen a huge boom in online sales (though I wonder how much Target’s/Walmart’s “extra” sales are balanced out by the lack of in-store purchases). People still have to spend on necessities, and as many a personal finance blogger has bemoaned, these days the American consumer has a very broad definition of what constitutes a necessity.
So how bare bones will the average American really get? That remains to be seen, I suppose. They’ll probably still replace technology as it breaks rather than do without. They’ll probably still order some amount of takeout unless things are truly dire.
But modern-day victory gardens are everywhere, and there’s been a renewed interest in cooking meals at home, especially given potential in-restaurant contamination (even just picking up food). So food spending may well go/stay down.
I’d hope a lot of people don’t feel comfortable going back to the movie theater yet. (Much as I’m dying for a big screen flick and some popcorn.) And at least some of us are still avoiding nightlife scenes. So entertainment/going out spending is likely going to stay down for a while.
And there’s also just the question of how much April’s momentum eggs people into continuing to save. There’s a certain satisfaction — arguably even a slight high for us finance nerds — that comes with a high savings rate. April’s results may spur Americans on to keep up their good work. To stay more thrifty and sock away cash in case the very prominent clouds on the horizon bring the much-dreaded rainy day we’re all anticipating.
Or maybe not?
But in the meantime, we’re still seeing an as-yet-unquantified number of people flocking to businesses now that lockdowns have eased. I fear the number will only increase. And when people are out — especially in clubs, bars and restaurants — they’re spending money.
So at the moment, we’re in a sort of Schroedinger-worthy super state. As far as we can tell from the incomplete/conflicting data at the moment, we’re both saving and spending. We won’t know for sure until we open the metaphorical box around July, when the consumer spending results from late May and all of June have come in.
I guess all we can do for the moment is try to find the delicate balance between supporting businesses and shoring up our own finances.
Is your spending back to normal? How many people seem to be going back to their normal lives where you are?