Rich Americans are holding up the economic recovery.
Unable to take flights, stay in fancy hotels or eat in expensive restaurants, they are sitting on their excess cash rather than finding new ways to spend it.
The change in behavior is having a ripple effect throughout the entire economy as jobs disappear and businesses close in the service sector and new ones are not created elsewhere.
The phenomenon can be seen in a personal savings rate for U.S. residents of 13.6% in October. While down from April's record 33.7%, it remains more than double the 6.1% average from 2000 to 2019, according to the U.S. Bureau of Economic Analysis. Data from Opportunity Insights shows that medium- and high-income households are still spending less than they were before the pandemic, while low earners are spending more.
"The simplest explanation [for the higher savings rate] is that higher-income people are still not able to consume the basket of goods and services that they would like to," William Emmons, lead economist and co-founder of the Federal Reserve Bank of St. Louis' Center for Household Financial Stability, said in an interview. "Travel, nice restaurants, Broadway shows … that's just not available."
The initial surge in the rate was mainly caused by an influx of government cash through stimulus payments directly to residents, but it has remained high as wealthier Americans continue to face limits on where they can spend their money.
Low-income households tend to spend a relatively high percentage of income on physical goods, such as groceries and other necessities, while higher-income households tend to spend more on "experiences," such as entertainment and travel, said James Knightley, chief international economist with ING. "Given most entertainment venues have remained shuttered through the pandemic and there are ongoing restrictions regarding travel and restaurants and bars, there is effectively involuntary saving going on for high-income households."
Instead of substituting what might have been spent on a concert or vacation by buying more clothes or appliances than they normally would, that money goes into the bank, economists said.
Third car?
As Emmons with the St. Louis Fed puts it: With many social distancing restrictions still in place, there is only so much more one can buy.
"You're not going to buy a third car or a fourth car just because you've got some extra cash in your bank account because you haven't been traveling or eating out much," he said.
As the savings rate surged in April, spending across all income levels plunged, data from Opportunity Insights, a Harvard University-based research group shows. Using anonymized data from private companies, including credit card processors and payroll firms, the group found that U.S. consumer spending fell by about 33% by mid-April.
Spending by low-income Americans at that time was down 27.3%, middle-income Americans down 31.3% and high-income Americans down 36.7%, according to Opportunity Insights.
Seven months later, spending by low-income Americans more than recovered and is now 1.8% above where it was in January, before the start of the pandemic. Spending by middle-income Americans is down 1.8% and spending by high-income Americans remains down 5.7%, the latest data shows.
Opportunity Insights breaks down the data by low, middle and high income, using median household income of zip codes. The top quarter of U.S. zip codes by income makes up the high-income bracket, where households have an average annual income over $78,000, while the bottom quarter, where households average less than $46,000 per year, makes up the low-income.
Services spending
There are also major variations by industry, as spending on groceries was up 16.1% for the week ended Nov. 22 from January while retail spending is up 12.4%, the data shows. Spending on restaurants and hotels is down 32.2% and entertainment and recreation has plummeted by 58.2%.
Total spending in the services sector has fallen by $590 billion since February, accounting for about 60% of the $990 billion increase in savings, said Aneta Markowska, chief financial economist at Jefferies.
While spending on goods and services both cratered in the first months of the pandemic, spending on durable goods is 14% above where it was in January, while spending on nondurable goods is up 3%, according to the latest data from the U.S. Bureau of Economic Analysis. Spending on services remains down 6% from January, the data shows.
That decline has been disastrous for the services sector. Employment in the leisure and hospitality industry is down by 3.4 million since February, the U.S. Bureau of Labor Statistics said Dec. 3.
Emmons said it is likely too soon to tell whether the seismic shift in spending by higher-income Americans will be a lasting trend, but economists interviewed this week said the trend is unlikely to survive the pandemic.
"Once a vaccine is broadly implemented across broad swathes of the population, both domestic and overseas, high income Americans will start travelling again and going out to restaurants," said Oren Klachkin, lead U.S. economist with Oxford Economics. "Once the crisis is fully behind us, the balance between consumer services and goods spending will likely return to pre-pandemic trends."