June 04, 2021 | 13:27
Saving Now, Spending Lots Later
Saving Now, Spending Lots Later
Household saving rates have skyrocketed on both sides of the Canada-U.S. border, reflecting the inability to spend because of pandemic-related restrictions. They also reflect the fact that household incomes were bolstered by government support programs and many people, particularly higher wage earners, were able to continue working during the pandemic.
The Canadian household saving rate was 13.1% in 2021Q1 (Chart 1). Although this is less than half the pandemic peak in 2020Q2 (27.4%), it still towers above the 2.0% pre-pandemic print (2019Q4). This created a massive amount of ‘excess’ savings, compared to a scenario in which the 2019Q4 saving rate held steady. The cache hit $220 billion in Q1 or about 9% of GDP (in this report, Canadian and U.S. figures are denominated in local currencies).
Meanwhile, household disposable income has grown at an 8.4% annualized rate since the pandemic (Chart 2). In Q1, employee compensation surpassed its prior peak, although average employment was still down 512,000 from its pre-pandemic level. This emphasizes the lower-wage slant to job losses.
Most of the net growth in income (61%) is accounted for by government support programs. Compared to the pre-pandemic amount, additional government transfers received by households peaked at $63 billion (not annualized) in 2020Q2, more than offsetting the contemporaneous $25 billion drop in compensation. As the latter recovered alongside improving employment, government benefits subsided; but, were still running $21 billion above end-2019 levels in Q1, mirroring the still incomplete jobs recovery (with enhanced unemployment benefits extended until September). During the past five quarters, additional government transfers have totaled $139 billion. For context, this is 63% of excess savings.
The U.S. personal saving rate was 14.9% in April (Chart 3), down sharply from 27.7% in March, which came close to April 2020’s high of 33.7%... all of which are well above the 8.3% pre-pandemic reading (February 2020). The U.S. saving rate has displayed a choppier pattern (explained below) that also resulted in a massive reserve of excess savings totalling $2.2 trillion or about 10% of GDP by April, compared to a scenario in which the saving rate held firm at the February 2020 level. Despite more stringent restrictions north of the border, which should contribute to relatively higher saving owing to the greater inability to spend, saving has been larger south of the border owing to stronger income growth.
U.S. disposable personal income has grown at a 10.2% annualized rate since the pandemic (Chart 4). (These data are monthly; but based on quarterly averages to be comparable with the Canadian figures, annualized growth topped 15%.) Employee compensation surpassed its pre-pandemic peak in November. And, again emphasizing the lower-wage skew to job losses, payroll employment in April was still down 8.2 million from its pre-pandemic level with household employment down 7.6 million. More so than in Canada, most of the net growth in income (79%) is accounted for by government support programs.
Compared to the pre-pandemic amount, additional government transfers to persons hit $282 billion (not annualized) in April 2020, before ebbing. But they re-spiked in January 2021 ($214 billion) and again this March ($414 billion), mostly reflecting the timing of the three rounds of economic impact payments. In April, as these payments dropped sharply from March, total benefits were still $132 billion above their pre-pandemic level. They are destined to slip further as the stimulus cheques end, but additional transfers will remain well elevated during the months ahead reflecting the incomplete jobs recovery. Although enhanced federal unemployment benefits were also extended until September, some states have announced their intentions to withdraw from the federal programs earlier citing concerns over disincentives to becoming employed. For the 14 months ending in April, additional government transfers have totalled $1.9 trillion. Again, for context, this is 86% of excess savings. The latter percentage is much higher than Canada’s, underlying the more generous support programs south of the border.
It’s unclear what Canadian and U.S. households will do with their massive caches of excess savings. After each round of economic impact payments, the NY Fed conducted a survey of how households had deployed, or intended to use, their stimulus cheques, with relatively consistent results among the three rounds despite their different cheque sizes . The average percentage spent ranged from 24.7% (3rd cheque) to 29.2% (1st), with the average percentage invested ranging from 36.4% (1st) to 41.6% (3rd). The remaining amount used to pay down debt ranged from 33.7% (3rd) to 37.4% (2nd cheque) . However, these allocations could be unique to savings amassed via windfall stimulus cheques and not representative of savings built up because of the inability to spend. We suspect most of the latter build will be deployed to fund the unleashing of pent-up demand.
For Canadian households, real spending on services is $77 billion (11.6%) below its pre-pandemic pace (Chart 5), keeping total spending under water despite a strong rebound in spending on goods (5.2% annualized growth since 2019Q4). For U.S. households, real spending on services is $401 billion (4.7%) below its pre-pandemic pace (Chart 6), but total spending has still managed to surpass its prior peak. This reflects the 14.0% annualized growth in real spending on goods since February 2020.
Apart from income growth (again, stronger south of the border), goods buying has benefitted from outlays on services being diverted to goods; think spending on groceries instead of at restaurants or on grown-up toys instead of vacations. Once economies completely reopen, some of the goods outlays should redivert back to services, but that doesn’t mean that goods spending is going to suffer a setback.
Some of the accumulated excess savings have already been deployed, i.e. spent on goods and services, invested such as in homes or the stock market, or used to pay down debt. However, if elevated total deposits in the Canadian and U.S. banking systems are any guide, we suspect households have yet to tap the lion’s share of their excess savings. They likely remain more than adequate to fund both a strong recovery in services spending and continued booming goods outlays, along with further investing and debt repaying. There’s likely even enough left over to help compensate for rising prices in lieu of faster wage growth, at least for a little while.
Bottom Line: Canadian and U.S. households have sufficient funds to propel real spending on goods and services to lofty record levels regardless of what they may have to pay.
 The first round of economic impact payments was $1200 per eligible adult and $500 per child, for a CBO-estimated budgetary cost of $292 billion. The second round was $600 per adult and child, for an estimated cost of $164 billion. The third round of stimulus cheques was $1400 per adult and child, for an estimated budgetary cost of $411 billion. [^]