US stock markets have been hitting new records recently, as investors swoon over the idea that the $1400 stimulus payments will power a major surge in consumer spending. But unfortunately, the facts show this is most unlikely.
The chart from the New York Federal Reserve measures consumers’ intentions with regards to the 3 stimulus cheques they have received since the pandemic began. As the Fed notes:
“The average share of stimulus payments that households set aside for consumption declined from 29% in the first round to 26% in the second and to 25% in the third.”
They also asked about people’s detailed spending plans for the January payment. Most of the money went on essential items – with just 6% was spent on non-essential items.
And three-quarters of the payment was used to increase savings and reduce debts.
This, of course, is exactly what anyone looking at US demographics would expect, as the above charts confirm. The USA is now an ageing society, and the majority of its population increase till 2030 will be in the lower-spending, lower-earning Perennials 55+ generation. Plus, unfortunately, the younger segments of the population – Blacks and Hispanics – earn much less than the older Whites and Asians.
This is quite different from the 1980s, when the Boomers were moving into their Wealth Creator years. In that period of their lives, they were happy to run up debt, secure in the hope that their incomes would rise as they moved on in their careers. But today, the latest jobs data for the Perennials shows their participation rate is just 38%, compared to 62% for younger people
They are also uncomfortably aware that the US has a growing pensions crisis. 69m Americans currently receive Social Security benefits and as the Congressional Budget Office (CBO) reported in September:
“Social Security is the largest source of retirement income for most Americans, and it provides nearly all the income for about 1 in 4 retirees.”
The CBO also warned that the main trust fund that pays Social Security will start to run short of money in 2031. Benefits will then have to be cut by a quarter for all recipients. Even worse, the Medicare trust fund will start to run out in 2024.
Against this background, it is hardly surprising that most people are choosing to either save their stimulus payments, or to use them to pay down debt.
The issue is really that the world is seeing a K-shaped rebound from the pandemic:
- One section of society has done very well over the past year – they have been in jobs which could easily be done from home, and have owned stocks and houses whose prices have been boosted by the Federal Reserve’s vast stimulus programme
- But many people, those in the gig economy, leisure, travel and hospitality, for example, have not done so well, and are very worried that the outlook for them is quite uncertain
Essentially, therefore, the 2020s are looking more like the 1930s, when debt was a major concern, than the Roaring Twenties. Companies and investors who understand this paradigm shift in demand patterns will be the winners as the rebound continues.