Source: Opportunity Insights
Americans' spending habits adapted rapidly when the World Health Organization (WHO) declared the novel Coronavirus (COVID-19) a global pandemic on March 11, 2020. Many Americans quickly reduced their spending during the pandemic; and, against their propensity to live beyond their means, they saved more money. The question is who had a greater incentive to save money during the COVID-19 pandemic, the “haves” or the “have nots”? And Why?
According to Google Community Mobility Reports, the stay-at-home orders restricted the population’s movement among various categories of places such as workplaces by -38% and retail and recreation by -34% in March. The reduction of mobility to workplaces increased from 38% to 47% in April – possibly as a result of layoffs. Lockdown restrictions affected a wide range of businesses, which contributed to the reduction in economic activity. Economic uncertainty spread contagiously and caused people, both willing and unwilling, to reduce their spending. During this period, spending dropped by -13.6%, with personal savings reaching a peak of 33.7% of disposable personal income.
The rapid increase of personal savings fueled a vicious cycle:
less spending -> less consumption of goods and services -> slowdown in economic activities -> economic uncertainty -> less spending
And let’s keep in mind that consumer spending normally accounts for about 70% of the US economy.
Economic uncertainty did not strike all consumers the same way. Intuitively, one would think that lower-income earners should have had a greater incentive to save. Yet, the numbers speak differently. It was certainly true that both high-income earners and low-income earners started to spend less starting in March 2020 compared to March 2019, yet not evenly. But, after May 2020, people with high income apparently continued to save more, while people with low income reverted to their pre-pandemic spending. Can the answer simply be that high earners are more proficient at frugality and self-control while low earners are instinctively more profligate – and (tongue in cheek) that is why they are poor in the first place? The reality is that America is not a leveled playing field, and Americans don’t jump into a crisis with the same incentive package.
In fact, the pandemic hit people with low incomes the hardest. While average unemployment spiked to 14.7% in April 2020, 40% of low-income folks lost their job. Therefore, many people with low-income hadn’t saved and couldn’t save enough money and kept living paycheck-to-paycheck (and hand-out-to-handout) to survive. For example, low-income earners spend more than half of their income on necessities like housing and food. Even in normal times, saving is not in their top priorities, but kicking the can down the road is less of a problem when the economy is humming.
In conclusion, the economic crisis and its aftermath highlighted the problem of a two-tiered economy. The issue seems to persist: COVID cases decrease, businesses reopen, people exit their homes, but high-income earners keep on spending less than they used to. Have they found other uses for their money – be it hoarding, investing (i.e. leverage the rock bottom interest rates), or building rockets that take them into space? Or are we witnessing the birth of a new class of super-savers?
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