The Americans received three rounds of government stimulus checkimproved unemployment benefits and other pandemic-related federal assistance, although they have been largely confined to their homes and have few places to use it.
The big question: How much of the money will they free up when the economy almost reopens this summer, as most are vaccinated?
The answer will determine how quickly the economy returns to pre-COVID-19 output levels and whether the increase in spending will be robust enough to trigger an increase in inflation that jeopardizes the recovery.
Many economists said the unprecedented circumstances set the stage for a historic consumption spree. However, spending will be moderated by the propensity of higher-income households to save most of the money and a reluctance on the part of many Americans to get out of their COVID-19 shells.
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“People are going to use it with pleasure, but they will not let go completely,” said Mark Zandi, chief economist at Moody’s Analytics. “It’s just going to take time to shake up the lifestyle they’ve had over the past year.”
Ethan Harris, head of global economic research for Bank of America Merrill Lynch, said consumption could be massive.
“There are lots of deferred expenses that could get into the economy very quickly,” Harris said.
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Americans have a total of about $ 2 trillion in enhanced savings as a result of federal payments and their limited lifestyles, including about $ 850 billion in stimulus checks, according to Zandi and Harris. It includes rounds of $ 1,200 and $ 600 payments last spring and in January, and the current $ 1,400 checks.
A Federal Reserve examination in October found that 29% of Americans initial stimulus payments were used, 36% were saved and 35% were used to repay debt.
Zandi said the pattern will largely be repeated this year, as Americans on average spend about a third of their $ 1,400 checks in addition to 20% of their total COVID-19-related savings. Although low- and middle-income households will use all or most of the reserves, high-income people are likely to spend only about 4% and save the rest because they see it as wealth, he said.
Zandi estimates that the top fifth of income recipients own 75% of the excess savings. Goldman Sachs estimated that the group has about 40% – still a disproportionate share.
Dwight Safer, 50, of Colchester, Vermont, invested all the stimulus money he received last year in stocks and plans to do the same this year.
“I did not need it,” said Safer, a semiconductor industrial engineer who recently received a large bonus. “It’s nice to have it, but I wish it would be another place that could be used better.”
Zandi said consumer spending will grow by 6.4% this year and the yield from COVID-19-related savings will add 2 percentage points to economic growth, which he estimated will be 6%. He does not predict a rise in inflation that would cause the Fed to raise interest rates.
Harris is more bullish. He said a relatively modest portion of the initial stimulus checks were used a year ago because people were nervous about the early recovery. The economy is in better shape – vaccinations are growing fast and many more spending places will soon be open.
Harris said high-wage workers will see much of their stimulus payments and excess savings as income rather than wealth that is typically accumulated over a long period of time. If so, they could use about 30% of it as they release accumulated demand, he said, while lower-income households spend most of their cache.
Overall, Harris expects consumer spending to grow 8.4% this year, while the economy grows 7%, paving the way for a possible rise in inflation in 2023.
Ted Adams, 77, of Wayzata, Minnesota, saved previous stimulus checks, but he partially used the latest payment of $ 2,800 for him and his wife to buy two new iPhone 12s that cost $ 1,600. The stimulation check made them move up in the purchases they had planned to make next year.
“It’s like finding money,” said Adams, a retired serial entrepreneur.
Mary von Tobel, 66, of O’Fallon, Illinois, saved some of the stimulus money, but used some of it to increase her donations to food banks and will likely use some to pay taxes and insurance payments to be paid next month. The payments could help fund travel that she and her husband plan to take on locally and to Japan this year. Even if they would have taken the holiday anyway, the money could make them spend something more lavish, she said.
“I look at it more as wealth,” said von Tobel, a retired technical writer. “We did not deserve it.”
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