It has taken just about one year to regain our collective balance, but I have increasing confidence the U.S. economy will very soon start running smoothly again.
Coinciding poetically with the end of winter, Americans are poised to sign off, get out and share a visible smile again. Spring metaphors will abound, and it will feel something like a spiritual reawakening for many in the U.S. to be sure. At the risk of tilting toward giddy, let me say that these positive effects will most surely affect the economic data.
The good news is that U.S. consumers are motivated to accelerate their spending behavior substantially. And due to aggressive fiscal stimulus from Congress, they are in a strong position to do so. This will impel economic growth that is well above trend in the second half of this year.
I have often said that you cannot stop Americans from spending; you can only occasionally and temporarily slow them down. The events of the past year strengthened this belief. The motivation to spend to which I refer is illustrated on the accompanying chart. This is a graph of the personal saving rate, as a percent of income, in the United States.
As you can see, prior to COVID-19, the cumulative rate of saving in the U.S. consistently hovered in a very tight range of approximately 6-8 percent. This was so reliable I am tempted to describe it with the overused adjective of "normal." And I fully expect the rate to revert back to this level in the coming months.
But at the end of last March, in one of the most dramatic shifts in consumer behavior I have ever seen, the saving rate skyrocketed. It has remained quite high ever since, and it will likely spike even higher in the next few weeks.
From a psychological perspective, it is not too difficult to see the logic in this abrupt shift. As the pandemic surged, there was huge uncertainty about the immediate future, so households became very conservative. This shock of conservatism, combined with the fact that many traditional options for spending were intentionally shut down, resulted in a wave of unused discretionary income.
And there was one more critical factor that we have not seen before: The Federal government turned on the printing press and sent everybody money. It was called COVID relief, and it is being widely lauded for keeping the economy moving and averting a total collapse into an economic depression.
As I write this column, another huge round of COVID relief has been approved and is on its way to consumers now. This means the line on the chart, which is already at an elevated level, will most likely jump again in the second quarter of this year. I am still uncertain that all of this fiscal stimulus will be good for the nation in the long run, but I have no doubt it will sharply boost consumer spending for the next year or two.
This chart is the best visual representation I can think of to depict pent-up demand. And there are a couple of other factors adding to the burgeoning pressure of this unexpressed consumerism. The stock market is near its all-time high and home prices have appreciated rapidly in the past year. Both of these trends will stoke the wealth effect.
I have never seen this combination of economic circumstances before. We are just starting to emerge from a severe recession, but the stock market is high, house prices are soaring, and we have a huge amount of money in the bank. Barring another shock of uncertainty, Americans are going to start spending.