Consumers draw from their cushions aggressively in September: Morning Brief
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Friday, October 2, 2020
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But the savings rate still gives consumer spending room to run.
We’ve written several times in recent weeks about the resilience of the U.S. consumer.
And now we know where that resilience comes from — savings.
On Thursday, the latest data on personal income and spending showed that incomes fell, consumption rose but at a slower rate, while the savings rate fell sharply.
The household savings rate stood at 14.1% in August, down 3.6% from July and well below the April high of 33.6%. Pre-crisis, however, the household savings rate was closer to 7%.
And so as we look back at better-than-feared consumer spending and confidence during the last few weeks, it is now clear what underwrites this data — consumers are drawing down the financial cushions they built up during the spring.
“As households have faced increasing financial constraints, they have dug further into their stimulus savings to pay for outlays,” said Gregory Daco, chief U.S. economist at Oxford Economics.
“Lower income families have been the key drivers of the sharp fiscally driven rebound in consumer spending, especially on the goods front. Without further fiscal aid, or stronger job growth, households may become increasingly reluctant to draw down on precautionary savings.”
The CARES Act, passed in late March, sent $1,200 checks to most U.S. households, while enhanced unemployment benefits offered an additional $600/week to those out of work through the end of July.
These benefits have since expired, an event initially seen as setting up the economy and consumer spending to fall off a “benefits cliff” through the fall. A cliff that has not yet materialized. Though Thursday’s data shows that savings are getting drawn down quickly. And makes clear the clock is ticking on the recovery’s ability to be fueled by these reserves in the absence of further stimulus.
“Today’s data continue to support our outlook for a strong rebound in consumer spending in Q3,” Daco adds. “Yet real-time data indicate that demand is set to lose momentum into Q4.”
The last three days have seen a flurry of headlines related to talks between Democrats and Republicans on approving additional stimulus, with investors broadly seeing these developments as positive. Just a few weeks back, conventional wisdom said no stimulus would be coming until 2021; a new bill now appears a very live possibility to come before the election.
This injection of spending power would be a boost to the economy and the consumer into the holiday shopping season and an uncertain winter in the U.S.