This report assesses how personal saving and other household sector “flows” have responded to the COVID shock and federal fiscal efforts to offset that shock. There are a lot of moving parts here, and the resulting complexity can seem impossible to resolve.
However, we may be fairly confident that the saving rate itself does not contain much useful information and that the ongoing recovery of consumer spending will be conditioned much more by the progress of the virus and its impact on social distancing than by household financial aggregates implying either pent-up demand or – with opposite effect — an enduring rise of precautionary saving.
To a first approximation, the “flows” reflect perceptions of the virus and are not themselves independently incremental. And to the extent my take here might be slightly off, the implications would be much less extreme (in terms of the quantification) than is implied by the saving rate spike.
There is one exception to this notion that the flows are endogenous. The Pandemic Unemployment Assistance (PUA) program has made a major contribution to supporting spending, particularly on essentials among low-end (including newly unemployed) households. If that program were to be abruptly withdrawn at the end of July, as scheduled, I estimate that consumer spending would take a hit of about 4 percent (not annualized). Depending upon how quickly other, pandemic-related, sources of restraint on consumer spending are abating two months from now, that effect could contribute to a stalling of consumer spending.
The numbers I had worked up before the jobs report on Friday were significantly larger, because I was working with a higher level of unemployment at the end of July. Friday’s job surprise made this risk less existential, but it persists.
My base case is that DC will figure out a way to taper this hit to the economy, stretching it out over several months to avoid the stall mentioned above. I don’t share the view that one jobs report will make the GOP indifferent to this issue and ready to put Trump’s re-election at greater risk (from their perspective) than it already is. But this issue is worth watching closely, via your contacts in DC. That certainly would be a better use of time than trying to draw inferences, good or bad, from the published saving rate.
This report, then, considers an important influence on the shape of the recovery. It does not get into the epidemiology, the pace of renewed social gathering, the pressure on state and local government finances, or the likely transitory effects of the Payroll Protection Program.
But it fits neatly into my view that the recovery will be a saggy V (or Y) with a period of rapid growth as the most acute forms of social distancing are lifted, followed by a longer slog, with recovery to full employment taking a couple years. The jobs report on Friday has encouraged many of us to move forward the starting point for that recovery and to revise down our sense of the peak output loss. The shape is unchanged, not to imply that is the sole consideration.