pandemic

San Francisco Fed Says Pandemic Surplus Is Gone; Boston Fed Demurs

Scott Buchanan2 Comments

Is it the best of times or the worst of times? This question I asked myself as I saw the following three headlines juxtaposed last week:

“US consumers are in the best shape ever” is sandwiched between two downers. The American consumer’s ongoing spending has staved off the long-predicted recession, quarter after quarter after quarter. Can we keep those plates spinning?

We noted earlier that the huge windfall of pandemic benefits (direct stimulus plus enhanced unemployment benefits) put trillions of dollars into our bank accounts, and the spending down of that surplus seems to have powered the overall economy and hence employment (and inflation). How the economy does going forward is still largely determined by that ongoing spend-down. Thus, the size of the remaining hoard is critically important.

Unfortunately, it seems to be difficult to come up with an agreed-on answer here. The San Francisco Fed maintains a web page dedicated to tracking “Pandemic-Era Excess Savings.” Here is a key chart, tracking the ups and downs of “Aggregate Personal Savings”:

This is compared to a linear projection of pre-pandemic savings, which is the dotted line. (Which dotted line you choose is crucial, see below) . The next chart plots the cumulative savings relative to that line, showing a steady spend-down, and that this excess savings is just about exhausted:

If this represents reality, then we might expect an imminent slowdown in consumer spending and in GDP growth, and presumably a lessening in inflationary pressures, which may in turn justify more rate cuts by the Fed.

But the Boston Fed says, “Maybe not.”  A study by Omar Barbiero and Dhiren Patki published in November titled Have US Households Depleted All the Excess Savings They Accumulated during the Pandemic? showed that it makes a huge difference which savings rate trend you choose for a baseline.

The following chart shows two versions of the first plot shown above, with (on the left) a linear, increasing projection of 2018-2019 savings trends, versus a flat savings rate baseline:

Two significant differences between these plots and the San Francisco Fed plot shown above are that these plots only run through the end of 2022, and that they display per cent savings rate rather than dollar amounts. However, they demonstrate the difference that the baseline makes. Using an increasing savings rate baseline (2018-2019 trend projection), the surplus was nearly exhausted at the end of 2022. Using a flat rate average of 2016-2019 for the baseline, the surplus was barely dented.

We will see how this plays out. My guess is that at the first whiff of actual recession and job losses, the administration will gush out the maximum amount of largesse; while we may have ongoing inflation and high interest rates due to the deficit spending, we will not have a hard landing. I think.

Pandemic Excess Savings Still Powering the Hot Economy

Scott Buchanan2 Comments

Well, the great “Recession Starting Next Quarter” that has been predicted for nearly two years is nowhere in sight. In fact, the Bureau of Labor Statistics just last week posted an absolute blowout jobs number:

The U.S. economy churned out a blockbuster 336,000 jobs in September, smashing economists’ expectations and heightening the risk that policymakers will have to push even harder to slow down the economy. The data released Friday by the Bureau of Labor Statistics offered yet another snapshot of the job market’s remarkable strength, with the unemployment rate holding at 3.8 percent and wage growth outpacing inflation in a boost to workers. But it was also the latest example of an economy that simply refuses to slow down, despite the Federal Reserve’s aggressive attempts to get prices and hiring closer to normal levels…The September report, which showed the largest number of gains since January, had been expected to indicate continued moderation in the labor market, with forecasts of around 170,000 jobs created. Instead, it came in at nearly twice that amount. (Lauren Kaori Gurley and Rachel Siegel , Washington Post)

Before we get too excited, let’s note that the BLS numbers have a strong component of BS: nearly every jobs number they put out is quickly, quietly revised downward by 20% or so. Also, much of the jobs creation this year has been in the part-time category (so employers don’t have to pay health benefits). That said, it is indisputable that despite ferocious interest rate hikes, the economy continues to hum along, much more robustly that nearly anyone predicted six or twelve months ago. Why?

I suggest that we follow the time-tested approach of investigative reporters, which is to follow the money. We have noted earlier that since 2020 a key factor in consumer spending, which constitutes about 70% of the economy, has been the ginormous windfall of free money, over $4 trillion, that was put into the economy via various pandemic-related programs (enhanced unemployment benefits, direct stimmie payments, etc.). The story of the recent strong jobs market is largely the story of spending down that windfall.

When we were locked down in late 2020-early 2021, we consoled ourselves with ordering tons of goods on Amazon. While this generated some jobs for longshoremen and UPS and Amazon drivers, it was mainly Chinese workers who benefited from this phase. But for the past year and a half, we are out there in planes, trains, automobiles, and cruise ships, spending for services and restaurant food at a brisk pace. This has buoyed up the domestic economy, which in turn is keeping inflation far above the Fed’s 2% target.

Part of the incoming-recession story has been that the COVID windfall money is about to run out. For instance, here is a June, 2023 chart from Fed authors de Soyres, et al.  showing that in the U.S. (black curve below) this money has already been exhausted:

A different set of Fed authors (Abdelrahman and Oliveira of the San Francisco Fed) wrote, also in June, that there remained a smidge of excess savings, but that “would likely be depleted in the third quarter of 2023.”

However,  the Bureau of Economic Analysis (BEA) recently completed an update of national economic data that lowered the savings rate prior to the pandemic and increased it in 2020 and 2021. This basically reflected a change in the way the BEA accounts for income from mutual funds and REITS. The bottom line is that it has forced Wall Street economists to increase their excess savings projections to date by as much as $600 billion to $1 trillion, depending on the economics team. This in turn leads them to delay forecasts of recession by yet another 6-12 months.

For instance, James Knightley of ING Global Markets Research writes that there are still plenty of excess savings around; recent revisions in their numbers show the remaining hoard is even larger than they originally thought:

They did not break down this excess saving by income group, so it is possible that much of it remains with the upper 10-20% who may hoard/invest it, versus the bottom quartiles who have been spending it all into economy and now may be tapped out. We shall see how this continues to play out.

Why No Recession (Yet)

Scott Buchanan1 Comment

Where is that recession that pundits have been predicting for over a year now? The suspense is killing me. Despite savage hikes in interest rates that have led to a collapse in regional banks and in home buying, the economy just keeps chugging along, and inflation continues to run way above the targeted 2% level. What’s going on?

An article I just read on the Seeking Alpha applied finance website points to three interrelated factors. I will cite and credit the author (whose moniker is “Long-Short Manager”; he runs a couple of investment funds) for the content here, while noting that I agree with his points based on other reading. These points all relate to ongoing strong financial position of the (average) American consumer, who mainly drives the spending in our economy.

( 1 )  Reduced Debt Service

The article notes:

The graph above shows household debt payments as a percent of disposable personal income going back to 2000. Since peaking at 13% right before the financial crisis, it steadily improved to 2020, with a subsequent large drop due primarily to lowered mortgage rates (usually the largest debt obligation of a household). It is the lowest it has been this century.

(Although mortgage rates have jumped in the past year, most existing mortgages were taken out pre-2023, when interest rates had been pushed to near zero by the Fed.)

( 2 )  Robust Wage Growth

The next graph from the Atlanta Fed’s wage tracker (note that the methodology used by this tracker is fundamentally different from the Fed’s employment cost index …) shows that job hoppers on average are making about 3% more than core inflation (call that 5%) whereas the average stayer is making a half percent over core inflation. This is allowing people to catch up for the year that they got behind on inflation.

Likewise, the author notes that although job quits have come down in the past year, they remain well above re-COVID levels.

( 3 ) We Are Still Spending Down Gigantic Pandemic Stimulus Windfall

As we have noted earlier, the government/Fed combination dumped some $4 trillion into our collective pockets in 2020-2021. This includes enhanced unemployment benefits as well as direct stimulus payments, at a time when much of our normal spending (e.g., on travel, sports, commuting, etc.) was curtailed. We are still spending down these excess savings at a good clip, which seems to be a fundamental driver of the currently robust economy:

The last figure on the consumer shows how excess savings (defined as the extra savings consumers accumulated during the pandemic due to fiscal transfers and reduced spending due to lockdowns) has evolved – it should now be around 700 billion and ought to be fully depleted by the end of the year – leaving the consumer still with the lowest debt service ratios of the century and wages caught up with inflation. If you are wondering why we haven’t had a recession despite economists saying we will have it within 6 months for about 12 months now, these charts should tell you why. The tailwind from consumers has exceeded any headwinds from reduced investment due to higher rates. 

And there you have it.

Wealth Growth During the Pandemic

Jeremy Horpedahl3 Comments

In the US wealth distribution, which group has seen the largest increase in wealth during the pandemic? A recent working paper by Blanchet, Saez, and Zucman attempts to answer that question with very up-to-date data, which they also regularly update at RealTimeInequality.org. As they say on TV, the answer may shock you: it’s the bottom 50%. At least if we are looking at the change in percentage terms, the bottom 50% are clearly the winners of the wealth race during the pandemic.

chart created at https://realtimeinequality.org/

Average wealth of the bottom 50% increased by over 200 percent since January 2020, while for the entire distribution it was only 20 percent, with all the other groups somewhere between 15% and 20%. That result is jaw-dropping on its own. Of course, it needs some context.

Part of what’s going on here is that average wealth at the bottom was only about $4,000 pre-pandemic (inflation adjusted), while today it’s somewhere around $12,000. In percentage terms, that’s a huge increase. In dollar terms? Not so much. Contrast this with the Top 0.01%. In percentage terms, their growth was the lowest among these slices of the distribution: only 15.8%. But that amounts to an additional $64 million of wealth per adult in the Top 0.01%. Keeping percentage changes and level changes separate in your mind is always useful.

Still, I think it’s useful to drill down into the wealth gains of the bottom 50% to see where all this new wealth is coming from. In total, there was about $2 trillion of nominal wealth gains for the bottom 50% from the first quarter of 2020 to the first quarter of 2022. Where did it come from?

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Inflation Has Wiped Out Average Wage Gains During the Pandemic (maybe)

Jeremy Horpedahl6 Comments

The latest CPI inflation report didn’t have a huge surprise in the headline number, with 8.3% being very similar to last month. But with the two most recent months of data, we can now see something very unfortunate in the data: cumulative inflation during the pandemic as measured by the CPI-U (11.6%) has now almost matched average wage growth (12.0%), as measured by the average wage for all private workers. I start in January 2020 for the pre-pandemic baseline.

What this means is that inflation-adjusted wages in the US are no greater than they were before the pandemic. They are almost identical to what they were in February 2020 (just 2 cents greater). But as regular readers will know, the CPI-U isn’t the only measure of inflation, and there’s good reason to believe it’s not the best. One alternative is the Personal Consumption Expenditures price index. Cumulative inflation for the PCE is slightly lower during the pandemic (9.0%, though we don’t have April 2022 data yet).

This chart shows average wage growth adjusted with both of these different measures of inflation, expressed as a percent of January 2020 wages. The CPI-U adjusted wages (blue line) have been falling steadily since the beginning of 2021, though the declines have accelerated in 2022. The PCE-adjusted wages (orange line) have also not performed superbly, but at least they are still 2-3% above January 2020. Still, the picture is not rosy: they’ve basically been flat since mid-2020 and have started to drop in early 2022.

Of course, average (mean) numbers can be tricky and sometimes misleading. What if instead we used median wages? Unfortunately, there is no hourly median wage data that is updated every month. The closest data that I usually look at is median weekly earnings, which is available on a quarterly basis. Here’s what that data looks like, expressed as a percent of the first quarter of 2020. I limit the data to full-time workers, since that should give us a roughly comparable number to the hourly data (hours of work may have changed, but using full-time workers should make it roughly constant).

For median weekly earnings, we can see that the picture is even less rosy. Median earnings have been declining consistently since the second quarter of 2020, regardless of which inflation adjustment we use. The decline in the PCE-adjusted measure isn’t quite as steep since early 2021, but both figures are below the pre-pandemic level, and have been for the past two quarters.

One final note: if we look at weekly earnings across the distribution, and not just at the median, we see something very interesting. Earnings at the bottom of the distribution seem to be performing better than those at the top. In fact, the 10th percentile weekly wage is the only category that is still above pre-pandemic levels. I’m only adjusting using the CPI-U here, but the patterns for the PCE-adjusted earnings would be roughly similar.

We should be cautious about interpreting this data too: if workers dropping out of the labor force are primarily at the bottom of the distribution, it will artificially push up the 10th percentile earnings level. It would be good to know how much of that is going on here. Still, I think this is an important result in the current data.

Dressed for Recess(ion)

Zachary Bartsch1 Comment

In my previous post, I decomposed consumer expenditures to figure out which service sectors experienced the largest supply-side disruptions due to Covid-19. I illustrated that transportation & recreation services were the only consumer service to experience substantial and persistent supply shocks. Health, food, and accommodation services also experienced supply shocks, but quickly rebounded. Housing, utility, and financial services experienced no supply disruptions whatsoever.

What about non-durables?

Total consumption spending is the largest category of spending in our economy and is composed of services, durable goods, and non-durables. Services are the largest portion and durable goods compose the smallest portion. So, while there were plenty of stories during the Covid-19 pandemic about months-long delivery times for durables, they did not constitute the typical experience for most consumption.

Even though it’s not the largest category, many people think of non-durables when they think of consumption. Below is the break-down of non-durable spending in 2019. The largest singular category of non-durable spending was for food and beverages, followed by pharmaceuticals & medical products, clothing & shoes, and gasoline and other energy goods. Clearly, the larger the proportion that each of these items composes of an individual household budget, the more significant the welfare implications of price changes.

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This Time was Way Different

Zachary Bartsch5 Comments

The financial crisis recession that started in late 2007 was very different from the 2020 pandemic recession. Even now, 15 years later, we don’t all agree on the causes of the 2007 recession. Maybe it was due to the housing crisis, maybe due to the policy of allowing NGDP to fall, or maybe due to financial contagion. I watched Vernon Smith give a lecture in 2012 in which he explained that it was a housing crisis. Scott Sumner believes that a housing sectoral decline would have occurred, and that the economy-wide deep recession and subsequent slow recovery was caused by poor monetary policy.

Everyone agrees, however, that the 2007 recession was fundamentally different from the 2020 recession. The latter, many believe, reflected a supply shock or a technology shock. Performing social activities, including work, in close proximity to others became much less safe. As a result, we traded off productivity for safety.

The policy responses to each of the two were also different. In 2020, monetary policy was far more targeted in its interventions and the fiscal stimulus was much bigger. I’ll save the policy response differences for another post. In this post, I want to display a few graphs that broadly reflect the speed and magnitude of the recoveries. Because the recessions had different causes, I use broad measures that are applicable to both.

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