Americans have saved $1.6 trillion since the pandemic started and it poses little inflation risk, the Fed says

Capital One ATM
A man uses the ATM at a Capital One bank in Midtown Manhattan on July 30, 2019 in New York City.

  • Americans’ savings rose by $1.6 trillion during the pandemic thanks to stimulus and weak spending.
  • Some experts fear households will quickly spend their savings and fuel runaway inflation.
  • Studies suggest most will hold onto the cash even after the US reopens, Fed researchers said.
  • See more stories on Insider’s business page.

Gradual reopening and widespread vaccination have economists wondering how Americans will spend in a post-pandemic economy. Researchers at the Federal Reserve Bank of New York see little cause for concern.

Americans enjoyed a savings surge during the pandemic as government stimulus hit households and lockdown measures cut down on spending. Estimates suggest people held on to roughly $1.6 trillion in savings since last March, when the health crisis first slammed the economy.

The sum highlights the scale of the government’s support throughout the coronavirus recession. Yet some experts fear that, if too much of these savings are spent too quickly, the recovery will be disrupted as rampant inflation takes hold.

Such a demand bounce is unlikely, professors and economists at the New York Fed said in a Monday blog post. For one, Americans who kept their jobs still haven’t spent nearly as much as they would in a pre-pandemic economy.

“Increased purchases of furniture, electronics, and other goods have compensated only in part for this reduced spending on services,” the economists said. “As a result, overall consumption has fallen for many households, even if their income is more or less intact.”

The roughly $5 trillion in stimulus passed by President Donald Trump and President Joe Biden over the last year also contributed to the savings boom. Relief doled out in direct payments and expanded unemployment benefits was used to pay down debts and cover living costs, but some was tucked away as savings.

It’s also possible that some households increased their saving habits as a precautionary measure due to uncertainty around how the economy would fare, the researchers said.

NYFed
Source: Federal Reserve Bank of New York.

The very nature of excess savings suggests they won’t be unwound too quickly. Stimulus recipients spent roughly one-third of the government support, according to Fed estimates. The rest was mostly saved, likely by households that already enjoy a financial buffer. It’s possible that circumstances change and force Americans to tap their savings sooner than expected, but the economy’s steady recovery should lead habitual savers to keep holding on to their funds, the team said.

Even when the economy fully reopens and Americans have more ways to deploy their cash, the researchers don’t expect a sudden rise in spending. Many are sure to dine out more often or take a vacation that wouldn’t have been taken otherwise, but there’s a limit to how much a household can boost its discretionary spending, the team said.

“It is certainly possible that some of these savings will pay for extra travel and entertainment once the COVID-19 nightmare is behind us, but our conclusion is that the resulting boost to expenditures will be limited,” the economists said.

This conclusion – and likely outcome – is a key reason why, as Insider’s Hillary Hoffower reported, a full economic recovery depends on the wealthiest Americans spending much more than they did over the last 12 months of the pandemic.

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US GDP growth will likely miss a key forecast if the global economy falters, Dallas Fed says

US Mall coronavirus
A shopper goes up in the escalator in Baldwin Hills Crenshaw Plaza on Tuesday, Dec. 8, 2020, in Los Angeles.

  • Weaker-than-expected global economic growth could hinder the US recovery, Fed researchers said.
  • The CBO expects US GDP to grow 4.6% in 2021, but the chances of that fade on slower global growth.
  • The Fed simulated 2021 growth 1 million times and found weak global growth almost guarantees US underperformance.
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The US economic recovery hinges a great deal on how the rest of the world rebounds, according to researchers at the Federal Reserve Bank of Dallas.

For the moment, the US is expected to fully recover from its virus-induced downturn by the end of the year. The nonpartisan Congressional Budget Office projects gross domestic product will expand by 4.6% in 2021, offsetting the 3.4% contraction seen in 2020.

Yet global risks could drag US growth below the baseline forecast, Fed researchers Jarod Coulter and Enrique Martínez-Garćia said in a study published Tuesday. A model of cross-country growth dependencies shows significant downside risks, and even that outlook is a relatively conservative scenario, according to the team. The data doesn’t reflect cross-country events linked to the pandemic.

Accordingly, the Fed’s estimates suggest a greater likelihood of weaker-than-expected global growth. And further modeling suggests a weaker global rebound would cut into growth in the US. 

By simulating 2021 growth 1 million times, the team found that disappointing outcomes practically guaranteed the US would miss the CBO’s estimate.

Fed
Chart via Federal Reserve Bank of Dallas.

In the worst-case outcomes – 0.5th percentile – global growth coming in below 2.7% equated to a near statistical certainty the US would grow by less than 4.6%. There was also a 55.3% chance that US growth would come in below 1%, essentially relegating the country to another year of bleak economic performance.

Even the bottom 25th percentile of scenarios, in which global growth is less than 5%, show a sizeable impact on the US recovery. Such outcomes set a 95.8% chance that US growth would land below the CBO’s projection, and a 17% chance it would come in below 1.9%.

The study suggests that, in “not particularly severe” tail events, poor global growth often coincides with US GDP growth that’s below the baseline estimate.

“The more extreme the negative global growth outcome becomes, the more likely that the US recovery would falter in 2021,” the team said.

Such global spillover can also erode the US’ long-term economic potential, the researchers added. The CBO revised its projection for potential real GDP slightly lower from January 2020 to February 2021, implying that, even after the virus subsides, the economy’s maximum possible output has been dented.

The central bank’s modeling signals the US’ path forward is notably vulnerable to a slowdown in the global recovery, and that growth through 2021 is critical to the country’s ability to return to pre-pandemic output.

“The longer the recession drags on, the more significant the impact on the U.S. economy’s potential can become – mostly through its impact driving up long-run unemployment – and the longer it may take for real GDP to return to its prerecession path,” the Fed researchers said.

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