American households are sitting on a big pile of savings — and that’s likely to fuel the U.S. economy through the spring and summer.
The level of personal savings leaped to a 21% annual rate in the first quarter and hit the second highest level on record, the government reported Thursday. The only time the savings rate was higher was during the early stages of the pandemic.
By contrast, the savings rate never topped 10% in the the seven years before the pandemic.
The high level of savings is no surprise. For one thing, the government sent out $2,000 in stimulus checks to most Americans in the first quarter. The savings rate also surged last year when Washington doled out large fiscal stimulus checks
“Consumers are flush with cash from the federal government’s massive fiscal stimulus programs,” noted Dan North, senior economist Euler Hermes North America.
Americans have also been saving more in case the economy took a turn for the worse. Many were able to save money they normally would have spent on gas, clothes, entertainment, travel and other services since they were stuck at home.
The record explosion in coronavirus cases at the end of last year, what’s more, likely spurred American households to sock more cash away early in 2021 until they got a better sense of how things turned out.
Finally a rebound in hiring in the first quarter — the economy added 1.5 million jobs — also put extra money in people’s pockets.
North said households have $1.9 trillion in excess savings. That is, savings above what they would normally have.
A lot of that money is likely to be spent in the next six months, economists say, if new coronavirus cases continue to fall and more people get vaccinated.
The fading pandemic would not only allow businesses to resume normal operations, it would give Americans more security to do the things they haven’t been able or willing to do: fly, dine out, go to a movie, attend a sports game or take a vacation.
“Consumers have lots of cash available, thanks to stimulus and extremely high savings, and will be looking to spend, especially on services,” said chief economist Gus Faucher of PNC Financial Services. “Rising vaccination rates and a greater willingness to go out in public will also support consumer spending.”
The path to normalcy got a little smoother in the first quarter. The broader reopening of the economy, combined with massive federal stimulus, spurred a 6.4% annualized increase in gross domestic product.
The economy is expected to grow even faster in the second quarter thanks in no small part to Americans dipping into their savings.