Americans’ personal income increased by 0.6% in December, driving their savings positions higher. The gains, reported by the Commerce Department on Friday, are creating the conditions for what we believe will be a consumer-led boom in the second half of the year.
The savings rate in December increased to 13.7% from 12.9% previously, and is likely to increase.
While spending to end 2020 was somewhat disappointing, the U.S. economy is poised to enter a strong period of growth this year with the influx of fiscal aid and likely new stimulus. All of that will be bolstered by the more than $1.65 trillion in excess savings Americans have built up compared to levels of before the pandemic.
Still, household spending declined by 0.2% on the month, which we attribute to the long delay in fiscal aid as the pandemic peaked. Those factors prompted consumers to pull back and local economies to be locked down.
The savings rate in December increased to 13.7% from 12.9% previously. Expect that rate to increase noticeably in the coming months as government transfer payments, fueled by the $908 billion coronavirus relief package passed in December, begin flowing to households in the first half of this year. In our estimation, that will create the conditions for a strong consumer-led boom in the second half of the year.
Core personal consumption expenditures, which is the Federal Reserve’s policy variable for inflation, increased to 1.5% on a year-ago basis in December.
Yes, the core PCE and other inflation metrics will begin to move higher this spring because of year-ago comparisons distorted by the economic collapse of last spring. But those increases will have more to do with last spring’s collapse in the price of oil, for example, than rising wages or shortages of supply.
For this reason, we do not expect a sustained increase in the price level and anticipate that transitory price increases will fade later in 2021. The Fed will look right through that transitory move and not alter its approach to the policy rate, asset purchases and forward guidance. Instead, the Fed will continue to focus on how long it will take the economy to return to full employment.
While the recent focus inside equity markets has been on GameStop and various trading platforms, forward-looking investors, firm managers and policymakers should be looking at cash positions being built inside American households.
There is a constructive narrative that is conducive to risk-taking and productivity-enhancing investments ahead of what we expect to be a robust period of growth over the next two years.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.