Americans received three rounds of government stimulus, improved unemployment benefits and other pandemic-related federal aid, even though they were mostly at home and have few places to spend it.
The big question: how much of the money will they release when the economy almost fully reopens by the summer, since most people have been vaccinated?
The answer will determine how quickly the economy returns to pre-Covid-19 production levels and whether the increase in spending will be robust enough to trigger a spike in inflation that jeopardizes the recovery.
Many economists said the unprecedented conditions paved the way for a historic spending surge. However, spending will be moderated by the tendency of higher-income households to save most of the money and a reluctance of many Americans to come out of their COVID-19 shell.
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“People will be happy to spend money, but they won’t let go completely,” said Mark Zandi, chief economist at Moody’s Analytics. “It will just take time to shake off the lifestyle they’ve had for the past year.”
Ethan Harris, head of global economic research for Bank of America Merrill Lynch, said the spending could be huge.
“There’s a lot of deferred spending that can get into the economy very quickly,” Harris said.
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Americans have a total of about $2 trillion in boosted savings from federal payments and their limited lifestyles, including about $850 billion in stimulus checks, according to Zandi and Harris. That includes rounds of $1,200 and $600 payments last spring and January, and current $1,400 checks.
An October survey by the Federal Reserve found that 29% of Americans initial incentive payments were issued, 36% were saved and 35% were used to pay off debt.
Zandi said that pattern will be largely repeated this year as Americans spend an average of about a third of their $1,400 checks, in addition to 20% of their total COVID-19-related savings. While low- and middle-income households will spend all or most of their reserves, high-income earners are likely to spend only about 4% and save the rest because they view it as wealth, he said.
Zandi estimated that the top-fifth of income earners own 75% of excess savings. Goldman Sachs estimated that that 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 didn’t need it,” said Safer, a semiconductor engineer who recently received a large bonus. “It’s nice to get it, but I wish it would go somewhere else where it could be put to better use.”
Zandi said consumer spending will grow 6.4% this year and the splurges from COVID-19-related savings will add 2 percentage points to economic growth, which he says will total 6%. He does not foresee a rise in inflation that would prompt the Fed to raise interest rates.
Harris is more optimistic. He said a relatively modest portion of the first stimulus checks were issued 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 points will open soon.
Harris said high-paid workers will see much of their incentive payments and excess savings as income rather than wealth that is typically amassed over a long period of time. If so, they could spend about 30% of that if they release pent-up demand, he said, while lower-income households spend most of their cache.
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All in all, Harris expects consumer spending to grow by 8.4% this year, while the economy will grow by 7%, paving the way for a possible rise in inflation by 2023.
Ted Adams, 77, of Wayzata, Minnesota, saved up previous incentive checks, but he partially used the last $2,800 payment for him and his wife to buy two new iPhone 12 that cost $1,600. The stimulus check prompted them to postpone the purchases they planned to make next year.
“It’s just found 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 tax and insurance payments due next month. The payments can help fund travel she and her husband plan to take locally and to Japan this year. While they would have taken the vacations anyway, the money may prompt them to spend a little more, she said.
“I see it more as wealth,” said von Tobel, a retired technical writer. “We didn’t deserve it.”
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