Post Number: 3352
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|Posted on Thursday, March 04, 2021 - 7:03 pm: ||
The Big Picture
Last Updated: 26-Feb-21 14:44 ET
High growth potential in high personal savings rate
The stock market doesn't need a lot of convincing to accept the idea that the U.S economy is poised to have a good, if not a great, year in 2021. Be that as it may, it was gifted another convincing reason in the Personal Income and Spending Report for January.
That reason wasn't embedded in the spending data, which was up nicely. No, it was embedded in the personal savings rate, which was way up.
Part of the Equation
The personal savings rate, as a percentage of disposable personal income, hit 20.5% in January. That is the third highest savings rate on record, trailing only the 33.7% rate seen in April 2020 and the 24.7% rate seen in May 2020.
Those high savings rates are very much part of the pandemic equation and are an offshoot of the following variables:
The receipt of large government transfer payments
A curtailment in spending activity due to COVID-related restrictions or fears (e.g. less travel, less live entertainment, less dining out)
A renewed emphasis on savings (for those able to save more of their disposable income) as the experience of the pandemic cast a light on the need to have an emergency savings fund
In time, the personal savings rate will decline and it may decline appreciably.
Over the past 30 years, the average personal savings rate, as a percentage of disposable personal income, is 6.8%, which includes the high savings rate seen since February 2020. If those high savings rates are excluded, the average is 6.4%.
Still, with Congress presumably only weeks away from approving another stimulus plan on the order of $1.5 trillion, there is reason to think the personal savings rate will remain quite high in coming months.
A Desperate Need and No Need at All
One of the main components of the stimulus plan calls for individuals with an adjusted gross income of $75,000 or less, or married couples filing jointly with an adjusted gross income of $150,000 or less, to receive $1400 stimulus checks. In addition, each dependent, regardless of age, would also receive $1400.
The stimulus payments get reduced going up the adjusted gross income scale. Individual taxpayers making more than $100,000 and joint filers making more than $200,000 are not eligible to receive any stimulus payment.
A lot of people desperately need this money, but without any true means test, there will also be a lot of people receiving a stimulus payment who don't need it at all. That creates some enviable options that include increased discretionary spending, paying down debt, or saving it.
Following the first round of $600 stimulus checks last year, a Census Bureau study published in June 2020 discovered that "Adults in households with incomes between $75,000 and $99,999 were more likely to use their stimulus payments to pay off debt or to add to savings, compared to households overall."
Much has changed since June 2020. The official unemployment rate then was 11.1%. Today, it sits at 6.3%, implying that the propensity to save this next round of stimulus checks, or use it to pay down debt, is likely to be even greater for households with incomes between $75,000 and $200,000.
Then again, there is an opportunity to eventually spend that money, and other money from savings, which is where this column is headed.
Sitting on Dry Powder
There is no doubt that there is a lot of pent-up spending potential. The personal savings rate indicates as much, improving vaccination rates suggest as much, relaxed restrictions allow for as much, and cabin fever will encourage as much.
The January Retail Sales Report provided such a glimpse. Retail spending on goods surged 5.3% month-over-month. Excluding autos, retail sales were up 5.9%. It was the largest monthly gain since June 2020 and one of the largest gains on record.
Incidentally, the surge in January Retail Sales came on the heels of a batch of $600 stimulus checks mailed out to eligible taxpayers as part of the $900 billion stimulus act signed in December by former President Trump.
What can also be called out is that the personal savings rate, as a percentage of disposable personal income, increased to 20.5% in January from 13.4% in December.
That's a lot of dry powder waiting to be barreled up and it is a data-based signpost that suggests there just might be some monster spending activity as the year progresses. That's partly why airline, cruise line, casino, hotel, and entertainment stocks, for example, have been big movers despite facing many sales and earnings constraints at the moment.
Norwegian Cruise Line Holdings (NCLH), for instance, just reported a fourth quarter adjusted loss of $2.33 per share on a 99.4% year-over-year decline in revenue. That hasn't stopped its stock. Shares of NCLH are up 15% in 2021 and up 318% from their March 2020 low.
What It All Means
A high personal savings rate is both a blessing and a curse. It's a curse in the sense that it reflects reduced spending activity, which matters in terms of job creation for an economy in which personal spending is close to 70% of GDP. It's a blessing, though, because it also shows just how much potential there is for stronger economic growth when that savings gets spent.
The world has felt cursed with COVID, but it is seeing the blessings of COVID vaccines each and every day. Those blessings will continue to increase as more people are vaccinated and global economies open up further.
When they do, and as they do, more money -- and potentially a lot more money -- is certain to be spent out of savings.
That matters greatly for a variety of reasons:
If spending accelerates, GDP growth will, too.
If GDP growth accelerates, earnings growth and job growth should, too; however, the risk of higher inflation also increases.
If higher inflation is seen (or feared), higher long-term rates should follow.
If long-term rates increase and profit margins are squeezed, stock market valuations will be called into question.
There is a lot to consider, but in terms of economic growth potential, it is clear that the potential for high growth is gestating in the remarkably high personal savings rate.