Prepare for Revenge Spending
Why is JPM Jaime Dimon talking about it?
Despite the new COVID surge, there is tremendous economic optimism running through the United States right now. Despite the warnings of the CDC and Dr. Anthony Fauci, Americans are beginning to revert to previous spending on services. Despite the words from the Biden administration that more needs to be spent, the economy is growing rapidly right now and will likely grow rapidly for the rest of 2021 and much of 2022.
Given today’s blowout retail sales numbers, what’s driving this?
There are 3 big factors creating the momentum and optimism.
Stating the obvious, we’ve made incredible gains against the virus and the inoculations are running well above where previous predictions thought possible just three months ago. Remember, the goal of the vaccines is not to necessarily eradicate the virus, but to lessen its impact and to reduce the ability for it to spread. The chart below clearly indicates the jabs are working as intended.
The second factor is the massive, massive, massive amount of stimulus in the economy and amount still coming. The total is over 50% of yearly GDP and is, quite simply, extraordinary. Remember, this isn’t your “shovel-ready-$900B-checks-in-the-mail-GFC” stimulus. This is “$12.9T-check-is-direct-deposited-pay-your-bills-and-trade-GameStop” stimulus. The graph below from CFRB is mind-blowing because it shows the size of the stimulus approved and the stimulus yet to come, $5.9T! It’s like A Christmas Carol, but with Christmas future turning into a big party and everyone gets champagne.
The last leg of this optimistic economic momentum is the consumer. In the US, the recipient of the stimulus checks/deposits did not run out and spend all of it. They did something that makes perfect sense, they saved it for a potential rainy day when the economy may get shut down again. JPM’s Jamie Dimon stated, “What happened is, the consumer has so much money, they’re paying down their credit card loans, which is good. Their balance sheet is in excellent, outstanding shape – coiled, ready to go and they’re starting to spend money. Consumers have $2 trillion in more cash in their checking accounts than they had before Covid.”
The graph below shows the US saved almost 12% of disposable income (blue) and cut spending (gold) 3% from Q1-Q3 2020. And it’s not just in the US.
NY Fed Liberty Street Economics provides these key insights, “Indeed, in the United States, Japan, and Canada, government assistance has pushed household income above its pre-pandemic trajectory. We argue that the larger scale of government assistance in these countries helps explain why saving in these countries has risen more strongly than in the euro area. Going forward, how freely households spend out of their newly accumulated savings will be a key factor determining the strength of economic recoveries.”
This dry powder can fuel a consumer spending boom, the likes of which we’ve not seen in decades. It’s what the retail sector calls, “revenge” spending or spending that occurs when consumers feel safe to return to stores, bars, restaurants and other service providers after being shuttered up in their homes for a long winter of COVID.
Vaccines, government stimulus and massive savings are driving the economic boom and optimism for future growth. This is not going to fade quickly but will likely soften towards the end of 2021 into 2022. Given this, no one should be concerned about the Biden infrastructure plan slowly working its way through Congress. The slower the better as it’s not needed now and it’s likely not needed in the future.
For now, the consumer is uncoiling. Get ready for more.