March1,2021 BARRON’S 33
THE ECONOMY
Total household net worth increased by roughly
$14 trillion from the end of 2019, with further
stimulus likely to ramp up the savings.
Why the Savings Boom
Won’t Boost Spending
As Much as You’d Think
S
taying home and getting
checks from the govern-
ment has done wonders
for the average Ameri-
can’s balance sheet.
Since the pandemic
began, the combination
of lower consumer spending on ser-
vices and $1.2 trillion of government
income support has helped consumers
save about $1.8 trillion more than they
otherwise would have as of January.
At the same time, stocks and houses
have soared in value, with the net effect
that total household net worth has
increased by roughly $14 trillion from
the end of 2019. The $1.9 trillion Amer-
ican Rescue Plan Act, which lawmak-
ers are still negotiating, would boost
incomes and savings even more.
Some economists fear that all this
spare cash could lead to overheating
once widespread vaccinations restore
prepandemic normalcy, with too
much money fueling a surge in de-
mand for scarce goods and services—
but that’s not a likely outcome. A close
look at where the money has actually
gone implies that the excess savings
will probably finance a modest post-
pandemic consumption boomlet
rather than an inflationary binge.
The two key points to remember:
First, savings in bank accounts are
much more likely to get spent than
paper gains on illiquid assets such as
housing and real estate; second, people
with the highest incomes are less likely
to spend one-off windfalls than people
lower down the spectrum.
The most detailed data we have
comes from the Federal Reserve’s Dis-
tributional Financial Accounts, which
tracksthe assets and liabilities of dif-
ferent groups of households over time.
From the end of 2019 through the end
of the third quarter of 2020—the lat-
est period available—total household
net worth rose by $5.2 trillion, with
$2.3 trillion of that increase coming
from a surge in bank deposits, money-
market fund shares, and other liquid
assets such as cash accounts at bro-
kerages. That’s money that can be
spent right away. About $1.2 trillion in
net worth can be explained by higher
stock prices, while surging home eq-
uity added $1 trillion. Americans’
spending on cars, furniture, electron-
ics, appliances and other durable
goods also contributed about $300
billion to higher household net worth.
While the Fed’s data end in Sep-
tember 2020, the U.S. stock market
has gained about 20% since then,
boosting total household net worth by
an additional $7 trillion or so. House
prices are also up about 5%, adding
about $1 trillion to owners’ equity.
And the total amount of deposits in
the banking system has grown by al-
most $700 billion, although some of
that may reflect additional liquidity
for businesses rather than for con-
sumers. Credit card debt has dropped
more than $100 billion.
So who actually has more cash to
spend? According to the Fed, about
28% of the increase in liquid assets
from the end of 2019 through the end
of September went to Americans in
the top 1% of the income distribution.
Fully 70% of the extra cash went to
Americans in the top quintile, with
only 14% of the extra cash—just $330
billion out of $2.3 trillion—held by
Americans in the bottom 60% of the
income distribution.
It’s likely that the distribution of
liquid assets has become even more
skewed since the Fed collected its
data—leaving even less spare cash for
the vast majority of Americans. As
government income support was
withdrawn over the summer, many
Americans were forced to dip into the
savings they had accumulated earlier
in the year to sustain their spending.
Economists at the JPMorgan Chase
Institute found that the typical Ameri-
can in the bottom quartile of the in-
come distribution has liquidated al-
most a third of the money in his or her
checking account since September. In
fact, most Americans outside the top
of the distribution had less money in
their checking accounts at the end of
last year than they did at the end of
the third quarter.
Stock market ownership is ex-
tremely concentrated, so most of the
gains have accrued to people who al-
ready have plenty of cash to cover
their spending needs. While the gains
from higher home prices have been
more evenly spread, they also aren’t
likely to boost consumer spending
that much. Economists have histori-
cally found that consumers spend
about 5% of any home-equity gains,
but this “wealth effect” was closer to
zero in the years leading up to the
pandemic, thanks in part to the tight-
ening of mortgage credit standards
after the financial crisis.
The only wealth category that has
grown more rapidly for lower- and
middle-income Americans than for
those higher up the spectrum is dura-
ble goods. But that simply reflects
their contribution to the consumption
recovery rather than an improvement
in their financial position that could
support future spending.
Joseph Briggs and David Mericle of
Goldman Sachs therefore estimate
that, even if the total amount of “ex-
cess savings” grows by half between
now and mid-2021 because of addi-
tional government income support,
only about 18% of that money would
get spent on goods and services once
the economy fully reopens. The rest
would likely be used by high earners
to invest in stocks or housing, and by
lower- and middle-income Americans
to build up needed cash buffers.
As a result, all the cash on the side-
lines—even after assuming the next
$1.9 trillion spending bill distributes
$1,400 checks to most Americans—
will probably only contribute about 2
percentage points to GDP growth next
year. That would be a helpful nudge
for the recovery, but not much more
than that.B
Contributions to changes in net worth 2019 Q4-2020 Q3, by income class
Uneven Gains
WhilemostAmericansarewealthiernowthanbeforethepandemic,muchofthebenefithasaccrued
to people at the top of the income distribution.
Sources: Federal Reserve Board; calculations
Bank accounts and other liquid assets
Stocks and mutual funds
Home equity
Consumer durables
Other(mostly pension entitlements)
Bottom 60% 60-80% 80-99% Top 1%
0
0.5
1.0
1.5
$2.0 trillion
Barron’s
By Matthew C.
Klein