Late Monday evening, the House and Senate passed a bipartisan stimulus bill that will appropriate $900 billion worth of funds to support the economy as it grapples with effects of the coronavirus pandemic. In its entirety, the bill represents roughly 4.5% of U.S. GDP and will provide stopgap support to businesses and consumers in need of assistance to weather the pandemic.
Roughly a third of the bill will appropriate funds toward Paycheck Protection Program (PPP) loans. These forgivable loans proved to be a successful means of helping businesses that struggled early in the pandemic. Allocating these funds will likely fall to the Federal Reserve to administer.
An added component to the bill is the continuation of $300 per week excess unemployment benefits, seeking to channel support to those whose employment was impacted by the virus. The other large component of the package, roughly $166 billion, is direct payments of $600 to most Americans. These payments are similar to the $1,200 payments that were sent out as part of the CARES act this past spring.
The dollars appropriated for direct payments represent about 1.2% of annual consumer spending. Typically, two out of every three dollars spent by a consumer are for services. It is the services sector that has been most impacted by the pandemic. According to the U.S. Bureau of Economic Analysis (BEA)¹ , consumer spending on services during the 3rd quarter of 2020 declined by -7.4% on an annualized basis, while consumer consumption of goods grew by +7.2%.² The components of the services sector that have fallen the most (transportation, recreation, food service) are those whose business models have had the greatest impact by COVID-19. Therefore, providing direct payments can support the economy, but they are unlikely to be directed to those sectors hardest hit, because of both restrictions and concerns around engaging in these services.
The Federal Reserve Bank of New York compiled a useful analysis in October where they examined what happened with the first round of stimulus payments that were issued this past spring. In summarizing their analysis, roughly one-third was saved, one-third was spent, and one-third was used to pay down debt. The New York Fed also surveyed where further rounds of direct payments might be allocated. Respondents indicated that a greater percentage, roughly 45%, of any future stimulus would be saved. Since the pandemic began, the personal savings rate has accelerated. Prior to 2020, Americans had been saving between 7-8% of their income. The savings rate spiked to 33.7% in April, and while trending down, remains elevated at 13.6% as of October. We do expect a meaningful portion of the latest round of direct payments to be saved, further strengthening the financial position of the average consumer.
Since the consumer represents nearly 70% of economic output, the fact that consumers have been saving more and paying down debt bodes well for long-term health of the economy. On one end, this leaves us optimistic that there is ample dry powder to support the economy in the years beyond 2021. The offset to this will be the drag to the economy that comes from the government digging out from the debt load taken on to survive the pandemic. This could come in the form of reduced government spending, higher taxes or even higher inflation. All of which will hamper the consumer is some manner. It’s too early to tell exactly how this plays out, but we do believe there will be a bit of a yin and yang over the next few years as the economy seeks to find its equilibrium.