People have responded to the economic turmoil produced by the 2020 recession by becoming more financially conservative. It is an understandable response, given the job losses (real or potential) that have affected many. The ongoing uncertainty about the duration of the recession, and pandemic, has prompted many to exercise caution with their non-essential spending. The chart below demonstrates that the savings rate remains at more than 60-year highs! What are the implications?
Consumer spending typically represents about 70% of the GDP of developed nations which makes it the major driver of economic growth. A higher savings rate results in lower consumer spending which, in turn, slows the economy. Lower sales of automobiles and trucks, household appliances, and lower-priced goods such as clothing have a clearly negative effect on the general economy. As well, this pandemic induced recession has had an especially severe effect on consumer spending given its devastating impact on the restaurant and tourism industries.
When can we expect consumer spending to recover to pre-pandemic levels? An effective vaccine is likely required to restore public confidence and begin a rebound in spending and reduction in the savings rate. If, and when, a vaccine appears remains uncertain. The various stimulus measures of the Federal reserve, such as slashing interest rates, will begin to have an effect once spending gains some traction, which could then produce a significant rebound in the economy.
The growing global evidence that the anticipated “second-wave” of the pandemic expected this fall, has in fact appeared. If so, we can expect consumer spending to remain subdued, which will constrain the economic recovery from the recession.
In economic terms, the effect of high savings rates is called the “paradox of thrift.” That is, people trying to be very careful with their money can sometimes work against their own interests because of the negative effect the decrease in spending has on the general economy. The unusually high savings rate may be producing this effect.
In conclusion, the savings rate suggests that we cannot expect a quick recovery from the current recession. Moreover, watching for a relaxation of saving by consumers may provide useful information in gauging an eventual economic recovery.