Why the Amazing Leap in Savings Rate to Record 33 Percent?

Mish

The Personal Savings Rate jumped to a record 33 percent. Why?

Let's start with a table and statements from the BEA's Personal Income and Outlays report. 

Personal Income and Outlays

Personal Income and Outlays aprl 2020

Details

  • Current disposable income rose 12.9% to $18.66 trillion.
  • Current PCE fell 13.6% to $12.51 trillion.
  • Savings = $18.66 Trillion - $12.51 trillion = $6.15 trillion

The personal saving rate is savings as a percentage of disposable personal income.

Savings Rate = ($6.15 / $18.66) * 100 = 33.0%

Cobid-19 Disclaimer 

Covid-19 Impact on Income and Outlays

"The full economic effects of the  COVID-19 pandemic cannot be quantified in the personal income and outlays estimate for April because the impacts are generally embedded in source data and cannot be separately identified."

Eight Things Impacting Savings

  1. Stimulus checks
  2. Forbearance Plans
  3. BEA Disclaimer and Imputations
  4. Work-From-Home
  5. Stores Closed
  6. Price Drops
  7. Deferred Medical Spending
  8. No Vacations

Income Surges as Spending Drops Most on Record

Let's fill in additional details, some from my report earlier today Income Surges as Spending Drops Most on Record

1: Stimulus Checks: The government sent stimulus checks for $1,200. These are a one time play and the effect will roll off.  Check distribution was uneven. People received a check if they were below a certain income level whether or not they lost any income to Covid-19.

2: Forbearance Plans: Credit card companies, auto loan companies, rent companies, and mortgage companies all allowed consumers the right to skip payments if they requested. These amount will have to be made up later.

3: BEA Disclaimer: The BEA admits "impacts are generally embedded in source data and cannot be separately identified." That pertains to points one and two but there are also mortgage imputations as explained below.

4: Work-From-Home: Those working from home are not buying as much gasoline or eating out for lunch. 

5: Stores Closed: Restaurants, bars, and general merchandise stores are closed. Services such as barbers and beauty salons are also closed.

6: Price Drops: Prices generally moved lower. Gasoline, plane tickets, and rental cars are standouts. Also some insurance companies voluntarily dropped rates as people are driving less. 

7: Deferred Medical Spending: Elective medical and dental procedures  were halted.

8: No Vacations: Obvious impacts on hotels, air travel, call rentals, restaurants.

Rent vs Mortgages

How did Mortgages Impact the Savings Rate?

Mortgage forbearance plans differ from credit cards, auto loans, and rent skip-a-pay plans. 

The BLS article CE and the PCE Comparison explains:

In CE publications, owner-occupied shelter  expenditures are defined to include mortgage interest and charges, property taxes, maintenance and repairs, insurance, and other related costs.

In contrast, the BEA defines the value of owner-occupied shelter for PCE as space rent, which excludes charges for utilities, major appliances, furniture, and furnishings.

The BEA has this blurb on the PCE Price Index which also ties back to the CPI.

The PCE market-based price index excludes most imputed expenditures, such as “financial services furnished without payment,” for which deflators are implicit, based on independent current dollar and chained-dollar estimates.

However, it includes “imputed rental of owner-occupied nonfarm housing,” which is deflated by the CPI for owner’s equivalent rent, so that the index will be comparable with the overall CPI. 

These articles imply that the BEA considers the imputed Owners' Equivalent Rent (OER) as a PCE expense but not the rest of the mortgage payment which is a capital expense and thus savings. 

If so, the amusing result is that the capital expense portion of the mortgage, whether skipped or paid, contributes to savings. 

However, the OER portion of the mortgage payment distorted savings upward (as did skipped rent, auto loan, credit card, and skipped payments in general).

In Regards to Point 3

Panic Sets In

Please recall Panic Sets In: Fed Promotes More Free Money

The Fed seldom mentions actions that Congress needs to take. Yet, we have back-to-back messages from Powell and Kashkari on the need for free more free money from Congress.

The Fed is very worried about skipped payments and the stock market both.

At Least for a While, It Pays Better to Be Unemployed

In regards to stimulus checks, At Least for a While, It Pays Better to Be Unemployed. 

Results will vary greatly.

Rebound

A spending rebound is coming up, but it will not take things back to what they were before Covid-19 hit. 

Mish

Comments (19)
No. 1-12
Sechel
Sechel

Amex is gearing up to collect all those owed monies. Mortgage forebearance is ending. So those gains will be short lived. But nobody is going anywhere, stores are closed so of course people are saving more.

Plus if you are working from home now you've just avoided a ton of expenses such as commuting , purchased overpriced lunches, dog walking in my case, dry cleaning business suits. Cost of living goes down when you no longer commute to work in many cases.

tokidoki
tokidoki

450 bucks back to work bonus will pad some people's account, but not enough since for quite a few people, there won't be a job to go back to.

numike
numike

save? at the ridiculous savings rate? why bother?

Mish
Mish

Editor

Excellent point about work-from-home - will add it

Maximus_Minimus
Maximus_Minimus

The FED is already on the case, and will respond accordingly. This travesty won't be allowed to stand.

Mish
Mish

Editor

Added the obvious

4: Work-From-Home: Those working from home are not buying as much gasoline or eating out for lunch.

5: Stores Closed: Restaurants, bars, and general merchandise stores are closed. Services such as barbers and beauty salons are also closed.

Mish
Mish

Editor

Here is another one

6: Price Drops: Prices generally moved lower. Gasoline, plane tickets, and rental cars are standouts. Also some insurance companies voluntarily dropped rates as people are driving less.

TimeToTest
TimeToTest

Spring break also didn’t happen witch can skew the data for March and April. That’s 3-6k for any family going on vacation. The tourism sector was the most affected so that might be one of the biggest.

Large purchase sales are down. Cars, boats, housing, furniture purchases have been postponed.

You could most likely read the most decline chart backwards to see where the savings has came from.

PecuniaNonOlet
PecuniaNonOlet

I have been working from home now since March and it is likely I will do so far into 2021. I did a back of the ipad list of money I have saved by working from home:

Money Saved

  1. Dry cleaning - $100 per week
  2. Gasoline - $30 per week
  3. Lunches - $100 per week
  4. Tolls - $25 per week
  5. Car insurance - $25 per month
  6. Coffees - $25 per week
  7. Uber - $25 per week
  8. Peer to Peer Charity - $100 per month - girl scout cookies, cure for cancer, etc.
  9. Miscellaneous business expenses (e.g. snacks when flying, toiletries, etc) - $100 per month.

Those are just a few items that come to mind. I think I am saving about $800 per month of expenses and will continue to do so for some time. I am surprised at how expensive beef is becoming at the grocery store. It is also becoming more scarce for the cuts of meat that I like.

Oh and I picked up a 4k tv from big box store for a mere $200 for my new home office. That was my biggest expense in May.

palmer808
palmer808

Keeping my 2019 federal and state tax monies owed until July 15th....

Tony Bennett
Tony Bennett

"Forbearance Plans"

...

The fact that Black Knight keeps track of mortgage forbearance makes me leery ... will forbearance potentially end up on your credit report?

If I had the capacity to pay, I would.

Mish
Mish

Editor

Added Point 8 and a Tweet regarding Point 3


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