“The difference between fiction and reality? Fiction has to make sense.” ~ Tom Clancy (1947-2013) American Novelist
Question: Since the pandemic, it appears that massive amounts of federal stimulus is going into our financial system. Where will all this money go and how might it impact the economy?
Answer: It’s been over a year since the $2.2 trillion CARES Act was signed on March 27, 2020 pushing funds into our economy between stimulus checks and enhanced unemployment insurance benefits. Additional bills were approved including President Biden’s American Rescue Plan Act for an additional $1.9 trillion that was signed into law on March 11, 2021.
So, what are the expectations for cash flooding our economy, super-low interest rates and millions of unemployed people as we navigate the pandemic? Recovery depends on beating and defeating the virus and many other variables including savings rates, inflation, job loss with a focus on infection rates and vaccines and reliance on future social restrictions and herd immunity.
When infections are reduced it’s likely that pent-up demand will be released in many areas. A contributing factor to this is a higher savings rate for sectors of our population, while at the same time, others have been negatively impacted through job loss, and/or reduced income levels. The effects are disproportionately felt across the socio-economic spectrum in large part due to the use of technology and work-from-home opportunities for many wage earners.
Household savings rates remain elevated (it’s difficult to spend if you can’t go anywhere) supporting pent-up demand and the foundation for recovery. According to Bloomberg, the U.S. household savings rate is approximately fourteen percent, compared to pre-Covid rates of roughly seven percent. Sadly, lower income homes have much lower savings rates as there are fewer discretionary items in cash flow matrix. The abnormal occurrence and wildcard in this scenario is that some displaced workers are reeling from this unusual recession and not feeling incentivized to return to the workforce. Household disposable income has risen in some areas of the U.S. and countries around the world. Resilience, confidence, clarity, and conviction may help bring us to a clearer picture of what the future may hold. The complexion of the overall economic recovery likely depends on how consumers utilize their additional or discretionary funds.
Those companies that were well positioned to transition their businesses using online and technological capabilities seemingly had an early advantage as Covid hit last year. The new term for this is “tech-deflation.” Once restrictions are lifted, companies with significant cash will be faced with decisions on how to deploy this excess savings. There are in essence four things individuals and corporations can do with their cash; spend, save, invest, donate likely with a focus on long-term recovery and pre-pandemic productivity levels. It’s expected that different sectors will position themselves differently based on their specific sectors and mixed experiences.
Consumption is expected to rebound, and we’re seeing inflation in many pockets of the economy, especially housing, materials, food, and energy. Gross Domestic Production (GDP) consists of consumption, total government expenditures, the sum of investments spent on capital equipment, inventories and housing, and net exports of a country’s total exports less total imports. GDP is one of the primary indicators used to measure the well-being of a country’s economy and standard of living. According to the U.S. Bureau of Economic Analysis, consumer spending accounts for 70% of GDP. This is why the retail and service industries are such important pieces of our economy. To answer your question of where will all the money go, a reasonable place to start is by examining personal consumption habits and trends as the economy reopens and observe where you are spending resources. Stay focused and plan accordingly.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results. The opinions expressed are those of the writer as of May 13, 2021 but not necessarily those of Raymond James and Associates, and subject to change at any time.
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This article provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email firstname.lastname@example.org Website: www.raymondjames.com/Darcie