Pandemic Stimulus Still Supporting Spending

The economy remains resilient and core measures of inflation are stubbornly high in the face of the most aggressive Fed tightening in decades. This resilience is partly a result of government stimulus programs during the COVID-19 pandemic. These programs generated a stockpile of excess savings that has continued to support household spending through rising inflation and higher interest rates. The Fed needs to counter that fiscal expansion in its fight against inflation.

Despite all the layoffs and furloughs, household income jumped during the pandemic due to the massive fiscal stimulus. Chart 1 shows the actual level of disposable personal income through the pandemic compared to trend. The income supports totaled more than $2 trillion in 2020-21. As the chart shows, the rise in income supports matched disposable personal income almost dollar for dollar.

Meanwhile, the boost to personal income came at a time when government was actively discouraging consumer spending. This was especially true in high-touch services, such as restaurants, recreation, and travel. Consumer spending dropped $1.2 trillion at an annual rate in the initial lockdown phase of the pandemic and was still $500 billion below trend a half year later at the end of 2020. Notably, spending was far below disposable income (see Chart 2A) which caused savings to surge. Chart 2B shows the magnitude of the rise in savings resulting from these unprecedented and opposing swings in income and consumption. At the outset of the pandemic, actual savings more than tripled and the combination of decreased spending and increased income from expanded unemployment insurance and the stimulus checks kept savings at unusually high levels.

Savings accumulated as consumers simply didn’t spend the waves of stimulus. We mapped the accumulation by summing the extra savings (the differences between actual and trend savings) over time. Chart 3 (bars) shows the extent of the cumulative excess savings, which jumped by more than $1 trillion by midyear 2020. Continuous waves of stimulus drove excess savings to a peak of $2.5 trillion in mid-2021. Since that time, consumers have saved slightly less than norms, which has diminished the cumulative amount of excess savings somewhat. However, the total amount of excess savings remains enormous.

Importantly, the excess savings has developed into an unprecedented rise in liquid assets. Household checking and savings accounts skyrocketed during the pandemic. Chart 3 (line) shows the relationship between the accumulated excess savings and the excess balance in household bank accounts over the past half-decade. This chart confirms that most of accumulated savings is sitting in consumer bank accounts ready to be spent. In other words, the stimulus during the pandemic, which consumers weren’t really able to use, is still available to support spending and absorb higher prices. This has made the Fed’s job more difficult.