An interesting phenomena is occurring during the sharpest downturn in the history of our country: Americans have money in their pockets.
Economic and banking data is revealing that Americans are earning and saving money during the coronavirus crisis, thanks to unprecedented stimulus from the federal government. The rescue funds could be responsible for facilitating the quickest recession in history.
Consumer spending and savings are both up year-over-year on a per member basis at digital banking company Chime, which serves more than 6.5 million clients. Chime is the largest of a new breed of branchless U.S. banks that offers no-fee accounts, free overdrafts and early direct deposits on paychecks.
“We’ve seen people sort of move and go get other jobs, we’ve seen people get access to unemployment insurance, to stimulus payments and all of this collectively has resulted in higher spend and higher savings actually, which is also a little bit surprising,” Chime CEO Chris Britt said at a Piper Sandler FinTech conference on Wednesday.
In the largest piece of stimulus legislation in our nation’s history, the U.S. government passed, in rapid fashion, the CARES Act in response to the global pandemic and record unemployment. The U.S. Treasury sent $1,200 to individuals with annual income below $75,000 and $2,400 to married couples filing taxes jointly who earn under $150,000, according to IRS.
The Treasury said Wednesday it made 159 million payments worth more than $267 billion to struggling Americans in just two months. The rescue funds were sent to all eligible Americans known to the IRS.
“These payments are an integral part of our commitment to providing much-needed relief to the American people during this unprecedented time,” Treasury Secretary Steven Mnuchin said.
Personal income jumps 10.5% in April
Amid a backdrop of 42 million Americans out of the workforce due to the Covid-19 shutdown, personal income increased 10.5% in April, the Bureau of Economic Analysis said last week. This is unique against the backdrop of past recessions where incomes fell overall.
When the U.S. economy was embroiled in the Global Financial Crisis, personal incomes — the money that people get from wages and salaries, Social Security and other government benefits — declined on the whole.
But as stimulus checks were deployed this spring in rapid respond to the coronavirus pandemic, American incomes actually rose. Oxford Economics estimates social benefits lifted income by roughly $3 for every dollar lost in compensation.
Disposable income also leaped 12.9% in April. Personal savings rose to a historic 33% from April to May as Americans stockpile cash during the government mandated shutdowns.
“Although unemployment is really troubling, the consumer balance sheet has been pretty strong. With the government funding unemployment the way they are, you have basically an entire swath of the population that is making money and not spending it,” Timothy Lesko, portfolio manager at Granite Investment Advisors, told CNBC.
“Go to the next tier of income and you have a middle class who kept their jobs and aren’t spending. The pent up demand is pretty significant, its just a matter of when they feel comfortable spending it and as each day goes on we seem to be getting better and better data about increases in travel and increased in spending.”
Economy vs. stocks
Congress approved the payments to see the economy through what will be its worst downturn since the Great Depression. Quiet remarkably, U.S. equities have almost fully recovered from the market rout, already looking through to a recovery in economic activity.
The three major averages are up more than 40% from their lows in March and the technology-heavy Nasdaq Composite is less than 1.5% from its record high. The S&P 500 is trading above the 3,100 for the first time since March and the Dow Jones Industrial Average is trading above 26,000.
Historic and unwavering monetary and fiscal stimulus programs are helping to keep stocks skyward as investors shrug off nationwide protests and tensions between the U.S. and China.
A severe uptick in consumer incomes and savings is contributing to the market “looking through,” said Lesko.
“As the economy opens, stock prices are starting to reflect what we’re going to see a year from now not what we saw during the depths of this in April and May,” added Lesko.
Chime business is up
Chime was alongside the government in wanting to help struggling Americans during the shutdown and for its efforts, it reaped the rewards.
Chime serves the “mainstream middle income consumer,” with customers tending to make about $50,000 annually in income. Chime’s members were some of the hardest hit by the crisis, Britt said. The The San Francisco-based company made available over $1.5 billion in stimulus payments between two and five days earlier than they arrived in people’s accounts from the federal government.
Members “went wild and loved it,” said Britt, and “led to the strongest enrollment days in the history of the company with very limited marketing spend.
“Overall, we’ve actually seen on the business side, were seeing a pretty significant in uptick in terms of volume of transaction activity, which is really how we make our money,” added Britt.
‘Income cliff amid policy fatigue’
While the fiscal support was essential in buffering the overall loss in compensation, much of the aid is temporary, mostly set to expire in July.
“With policy fatigue seemingly taking hold of Congress, we foresee significant income cliffs,” Gregory Daco, chief U.S. economist at Oxford Economics, told CNBC.
Oxford Economics anticipates income will be about 5% to 6% below its pre-coronavirus level in the second half of the year.
“This will likely act as a constraint on the consumer spending recovery well into 2021,” said Daco.
Daco expects the jump in savings to reverse alongside the decline in fiscal policy support and a “normalization of spending under a lower income growth regime.”
Mnuchin said last month there is a “strong likelihood” the U.S. will need another coronavirus relief bill to stabilize the economy.
— with reporting from CNBC’s Nate Rattner.
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