Will Higher Savings Propel the Economy? Maybe Not

The stay-at-home culture that sprang from the COVID-19 pandemic has increased the US savings rate. And many economists expect all that cash to course into the economy and give it legs going forward. But research firm TS Lombard is doubtful, as it casts an eye back at World War II—and anticipates continuing virus outbreaks.

“For the bulls, this extra cash is sitting in bank accounts ready to be unleashed in a massive inflationary boom as soon as the end of the pandemic sparks new YOLO [you only live once] attitudes,” wrote Dario Perkins, the firm’s managing director for global macro. But the pessimistic view is that once this money is spent “pre-pandemic disinflationary forces are set to become even more entrenched.” Perkins said he thinks the truth lies in the middle of these two stances, but either way he is sure that no boom is in the offing from all this saved-up money.

Indeed, personal spending picked up after the short-lived pandemic recession last year, with some of those outlays also helped by government aid. Lately, that spending has moderated. Meanwhile, the personal savings rate is elevated compared with before the onset of the coronavirus; it’s now 12.9% of disposable income vs. 7.8% a year ago January; last year, in the pandemic’s early phase, it shot up double digits briefly, as people pulled back from retail purchases. Former Treasury Secretary Larry Summers is one economist who expects this pool of cash to flood the economy after the pandemic recedes, risking further inflation.

Perkins draws a lesson from World War II, when rationing and shortages ruled the consumer economy, as much of the economic resources went into the war effort. US households during the war saw the personal saving rate hit 25% for a sustained period. Once the war ended, pent-up demand fueled a powerful economic recovery. Not to mention inflation.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

“Looking at the data, however, we discover that much of the accumulated savings never made it into the economy,” Perkins wrote. In other words, many folks sat on their savings, fearful that the Great Depression might resurge. “The US saving rate dropped sharply, as everyone expects it will today.”

Perkins opined that the US will follow the same pattern. There will be a spending boost up ahead, yet nothing like what Summers envisions, he said. Instead of trepidation about a return of the Depression, which bedeviled the World War II generation, today’s consumers will fear recurrent onsets of COVID-19.

As Perkins sees things, “The pandemic is likely to be around for a while [as the Delta variant illustrates].” Result: “The sudden and dramatic transformation in sentiment [which many pundits anticipated at the start of the year] may never materialize.” The economic recover of 2021 has ebbed, he notes, warning, look for further economic setbacks this fall.

3 Inflation Scenarios: How Bad Could It Get?

Why Corporate Execs Have the Supply Chain Blues

Tags: cash, consumer spending, Dario Perkins, Economy, Great Depression, Inflation, Pandemic, pandemic recession, savings rate, TS Lombard, World War II

For the first time since 2008, US public-worker pension plans are projected to be more than 80% funded, which can be attributed to increased employer contributions and a fierce bull market, according to a study from Pew Charitable Trusts.

“Such progress would be significant in any year, but the improvement in fiscal 2021 occurred during a recession in which many analysts predicted that revenue losses related to the COVID-19 pandemic would increase retirement fund shortfalls,” said the study.

Yet, instead of funding declines the research found an increase in assets of more than $500 billion in state retirement plans, which was buoyed by market investment returns of more than 25% in fiscal 2021 as well as sharp increases in pension contributions from taxpayers and public employees. Pew said it is the highest annual returns for public funds in over 30 years, and the nonprofit organization estimates that state retirement systems will have less than $1 trillion in accumulated pension debt for the first time since 2014.

The study said that the contribution increases, “which came after years of states shortchanging their systems,” are part of an upward trend over the past decade as contributions have increased an average of 8% each year during that time. It also found that in Illinois, Kentucky, Pennsylvania, and New Jersey, which have the most underfunded retirement systems, contributions increased by an average of 16% a year over the same period.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Additionally, Pew said, almost every state has also enacted benefit reforms to lower costs, including cutting benefits for newly hired public workers. It noted that officials in many states have become more disciplined about managing pension finances, using tools such as stress testing to determine how fluctuations in the economy might affect pension funds.

According to the study, “successful” state pension systems—e.g., those in South Dakota, Tennessee, and Wisconsin—have had consistently run high-funded ratios over the past 20 years in part because they have strategies to mitigate cost increases during economic downturns. Such strategies include policies targeting debt reduction and sharing gains and losses.

“An increase in pension contributions of the size seen over the past decade signals a shift in budget priorities by state policymakers and a recognition that the costs of postponing obligations are untenable if left unaddressed,” the study said. “Although this has improved the outlook for state pension plans, it has also crowded out spending on other important programs and services and left states with less budgetary space to sustain future rises in pension payments.”