Households are spending more and savings less, enjoying their summer and getting ready for school, government data released on Friday suggests.
In short, households are getting back to normal.
But whether that’s sustainable will probably be determined by somehow convincing all Americans to get a vaccine.
In the meantime, the spending and saving behavior of households in the past three months provides a look at what could be accomplished if that happened.
We should start with income in inflation-adjusted terms, which has nearly recovered to the pre-pandemic levels of February 2020. Real personal income is growing at a 4.7% yearly rate, but that is compared to its depressed level of June last year. And we expect lower levels of income as pandemic assistance is withdrawn and low-income workers return to low-paying jobs.
Personal consumption appears to be re-establishing its pre-pandemic trend, moving 6.7% higher in nominal terms than in February 2020. Spending in June was 13.6% higher than the previous June, but again, that was inflated by comparisons to an extraordinary drop in spending during the pandemic. Nevertheless, households appear willing to spend more of their income, which is a sign of growing confidence in the economic recovery.
But when inflation is factored in, personal consumption tells the same story: a full recovery from depressed pandemic levels and restoration of long-term trends. Spending in June 2021 was 2.8% higher in real terms than February 2020 and is increasing at a 9.2% yearly rate made higher by base-period effects. Regardless, spending has returned to normal levels of growth,
So if real personal income is flat relative to pre-pandemic levels and if personal consumption is increasing, where is the money coming from? As government support is reduced, the source is likely to be a reduction in savings.
Personal savings has been falling over the past 12 months after an extraordinary leap in precautionary savings from March to June last year as households were hunkering down. The success of the vaccination program earlier this year softened the propensity to save, and it remains to be seen if the spread of the delta variant will affect household psychology.
Measuring personal savings as a percent of disposable income gives a more accurate reading of the degree of household precautionary savings. The decline in savings to 9.4% of disposable income suggests elevated levels of caution, but is an encouraging sign that savings are getting back to its normal 6.6% non-recession average.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.