Savings As The Big Tell
Economists of all stripes believe we are in the foothills of a big upward slope in short-term spending pushed by pent-up demand after a year when many people’s favorite spending outlets were shut. Airline bookings are rising, as they are for cruise lines, hotels and restaurant reservations.

But it’s important to note where Americans’ savings rates finally settle after the pandemic ends, because the savings number holds vast implications for clients, advisors and markets alike. For a few months during the pandemic, the rate spiked to 27%, albeit with the aid of government checks. While some of that money flowed into the stock market, households also focused on paying down debt last year.

In the decade before 2020, the savings rate had climbed to about 8%, nearly double what it was in the years leading up to the 2008 financial crisis. Anecdotal evidence suggests the Covid-driven housing boom of the last year was financed on a more solid foundation, with larger down payments and fewer dodgy mortgages.

Last year’s recession was unlike any other in both its sharp, deep drop and its brief duration. “We’ve never had a severe recession like we had [last] year because we’ve never had a lockdown,” Ed Yardeni of Yardeni Research told attendees at John Mauldin’s Strategic Investment Conference in May. “Even people who lost jobs and got checks couldn’t spend it all.”

Most recessions, Yardeni said, are caused by credit crunches. But despite the massive issuance of government and corporate debt as a response to the pandemic, there hasn’t been a credit crisis. Remarkably, the junk bond market has seen very few defaults.

Yet there is another side to the savings story. Liz Ann Sonders, chief market strategist at Charles Schwab & Co., told attendees at the same conference that savings rates could remain elevated. That often happens after nasty recessions, as it did after the great financial crisis.

“If we don’t see a drop in the savings rate” and fiscal stimulus starts to fade into the rearview mirror, economic growth could sputter, Sonders said. This could result in a short-lived expansion, a stark contrast to the longer growth cycles Americans have grown accustomed to, after seeing only three recessions since 1991.

The idea of Americans not spending enough money might seem laughable. We’ve always been a nation that has lived up to its means, if not beyond it.

Yet another speaker at the Strategic Investment Conference, David Rosenberg of Toronto-based Rosenberg Research, showed that consumer spending by the cohort over 65 is almost 20% less than it is for the one ages 55 to 64.

Advisory clients are savers by nature, and many financial advisors can attest that retirees sharply curtail their spending when the paychecks stop. Research conducted several years ago by BlackRock’s retirement plan group found that many people two decades into retirement still held on to more than 80% of their 401(k) balances.

Robust stock markets clearly helped those balances, but savings have also been shored up because people change their spending behavior later in life. Retirees with more time on their hands discover new activities like cooking, which is cheaper and healthier than dining out. That’s all fine and well, but if the Woodstock generation suddenly turns into a gang of Ebenezer Scrooges, the ramifications for America’s consumer society could be far-reaching.

Productivity: The Magic Variable
How much people can save depends partly on how fast they return to work, which will dictate the shape of the recovery. Federal Reserve chairman Jay Powell and Treasury Secretary Janet Yellen have both said they want to see unemployment return to pre-Covid levels by the end of 2022.

Virtually all the participants at Mauldin’s event agreed that productivity should spike, as it almost always does when we emerge from a recession. Yardeni called it the “magic variable,” one that could eventually put pressure on wage increases and sustain profit margins.

“Productivity usually jumps 5%” after a recession, says Lacy Hunt, executive vice president and chief economist of Hoisington Investment Management. “It could do better this time.”

He also thinks reinvigorated trade will prompt deflation. During the pandemic, domestic manufacturers gained market share, and Hunt expects exporters to America to slash prices to recapture business.

This may not bode well for the jobs that Powell and Yellen are hoping for. As Rosenberg noted, U.S. output is almost back to within 1% of the level it stood at before the pandemic, even if the composition has changed, now that technology and durable goods sales are higher while travel and leisure business has fallen off.