Why pent-up demand is disappointing

TSLombard with the note:

Households’ ‘excess’ savings haves urged globally in the midst of the pandemic, led by the US. American consumers’ surplus savings accumulatedsinceMarch last year ballooned to $2.4tn in June. But the boost toUSconsumption from households’ large savings buffers–whilst some of the largest globally–is likely to be short-lived and less than what headline numbers suggest.

US households’ surplus savings as a share of GDP and private consumption was the largest amongst OECD countries at the end of last year. Our calculations show that the gap has widened since then because of new rounds of stimulus checks and forced savings earlier in the year.

Excess savings in the US could rise further, but at a much slower rate than over the last year, unless a resurgence of new infections throws a spanner in the works. Authorities have eased restrictions on activity and services spending is making a strong comeback. At the same time, the boost from stimulus checks is behind us. Disposable income gains going forward will depend on the rate of wage gains and not large fiscal transfers.

The surplus savings accumulated so far will continue to spur consumer spending especially on services, coinciding with a winding down of restrictions on tourism and hospitality sectors. UShouseholds’ personal savings rate fell to 9% June from a recent high of 27% in March 2021 and an all–time high of 34% in April 2020 (based on data available from 1959). Services spending has bounced back strongly over the last quarter, following a disappointing start to the year.

We have been making the case that pent-up demand is less than what headline figures suggest and this is gradually becoming evident in the data. Spending on consumer goods struggled last quarter, led by a decline in spending on durable goods.

Consumption of durable goods during the pandemic surged well above its trend rate of growth(see chart below). An acceleration in spending on durable goods was observed for households in all income quintiles, but the increase was the most pronounced for those in the bottom quintile as they spent their federal relief checks. With stimulus checks behind us, durable goods demand will continue to show signs of fatigue. In addition, the surge in durable goods demand since the start of the pandemic was more than double the recoveries in personal consumption in previous cycles, making it highly unlikely that the momentum is sustainable.

Meanwhile, services activities have a much smaller component of pent-up demand. While the purchase of durable goods can be postponed because of an exogenous shock, thereby creating pent-up demand, people do not have several haircuts when salons reopen. Similarly, consumers may enjoy more expensive holidays when restrictions ease, but they are unlikely to take multiple holidays to compensate for the lost years of travelling.

The distribution of savings is highly skewed towards high-income households, limiting the boost to consumption(see chart below). Portfolio rebalancing will be another factor limiting spending. Households have directed their savings towards liquid assets. We argued at the start of the year that as uncertainty abates, households would want to rebalance their portfolios to add more non-liquid financial and non-financial assets rather than spend all their savings currently held in the safer instruments. This trend may have further to run. We will discuss these themes in detail in our next Global Financial Trends publication.

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