Morgan Stanley
  • Thoughts on the Market Podcast
  • Jul 22, 2021

So How Healthy Is the U.S. Consumer?

With Ellen Zentner and Sarah Wolfe


Ellen Zentner: Welcome to Thoughts on the Market. I'm Ellen Zentner, Chief U.S. Economist for Morgan Stanley Research.

Sarah Wolfe: And I'm Sarah Wolfe, also on Morgan Stanley's U.S. Economics Team.

Ellen Zentner: And on this episode of the podcast, we'll be talking about the economic health of U.S. households amid covid uncertainty and expiring pandemic relief programs. It's Thursday, July 22nd, at 9:00 a.m. in New York.

Ellen Zentner: So, Sarah, we saw peak economic growth in the second quarter of this year, we're currently tracking nearly 12% GDP for the second quarter with consumption at 11%. And that's just eye popping numbers. We're currently forecasting that speed of growth will slow. But I wanted you to talk to our listeners to give them a snapshot of the consumer data behind that forecast.

Sarah Wolfe: Great. Thank you, Ellen. There are a lot of crosscurrents happening right now for the U.S. consumer. We have a bulk of the household stimulus programs, including the economic impact payments and the elevated unemployment insurance benefits that are fading. We'll no longer be receiving any more economic impact payments. And that was a really important boost to income and spending as we moved into 2021. Nonetheless, we are getting more and more income growth from job gains. Altogether, though we do expect that spending will remain robust over the next year and a half. And a large part of this is as a result of the excess savings stock that's been built up since the beginning of the pandemic.

Sarah Wolfe: So when we look at excess savings, we're talking about savings above the pre-COVID trend. And right now, relative to the beginning of 2020, we have $2.4 trillion in excess savings that's been accumulated over the last year and a half. And it's this excess savings that will also be very supportive of spending over the next year and a half alongside growing wage income.

Ellen Zentner: You run our consumer platform at Morgan Stanley. As you can imagine, it's a huge platform being 70% of the U.S. economy. And so, your view on how folks are going to spend that savings has been very important in shaping what you expect for consumer spending going forward. And so I want you to drill down into more of the breakdown of that savings, because not everyone spends out of savings. And also it might be held differently across income groups. So how do you parse that through into the outlook for consumer spending and the types of spending that we could expect?

Sarah Wolfe: So you are correct, the marginal propensity to consume liquid assets—so how likely you are going to spend down liquid assets that you have—varies significantly across income groups. The top 10% spends as low as 5-10% of their liquid assets, whereas the bottom 20% spend 70% or more of that. So while two thirds of excess savings seems to be held by the top 10%, there's still one third of excess savings—so a little over $700 billion—being held by the bottom 90%, by lower and middle income households. And so using the weights of who holds the excess savings, that's how we get to our marginal propensity to consume. And that ends up at about 20-25% marginal propensity to consume excess savings.

And this ties into our wallet share shift story. So a lot of these dollars that got spent during the pandemic went to durable and non-durable goods which gained spending share at the expense of services losing share. And just in the last few months, as the economy has begun to reopen, people are putting this excess savings into the services category, including dining out, amusement parks and other recreational services that were major COVID losers.

Ellen Zentner: So, you know, you talked about economic impact payments. Now let's get into the expiration of unemployment insurance. Which programs are expiring and what's the handoff look like as people go back to work?

Sarah Wolfe: The unemployment insurance benefits have been a critical lifeline to households. What we are seeing, though, is more and more people are leaving the unemployment insurance benefit program as they go back to work. And it's becoming less important as we see job growth continuing and wage growth rising. Further, we are seeing that while the federal programs are set to expire on September 6th, twenty four states have decided to end the programs early in June and July, believing that the unemployment insurance benefit supplements are a disincentive effect to labor supply. So currently we have these 24 states that are ending the programs early or have already ended them. And these states, I will note, only account for about 30% of unemployment in the U.S. So they're disproportionately smaller. And then the remaining 26 states, plus Washington, D.C., which will keep the benefits through September 6th, account for 70% of those who are unemployed. So a larger bulk of those unemployed and those on the benefits will be kicked off come September.

Ellen Zentner: OK, but we're still hearing a lot of reports from companies struggling to fill positions. And so I guess the key question here is, you know, what are we seeing in the states where benefits have expired? Are people going back to work? And can that tell us anything about what happens broadly across the economy as all of the benefits expire?

Sarah Wolfe: There is a lot of mixed evidence and we're looking at this very closely. We've been dicing up the unemployment insurance claims data on a state-by-state basis, as well as the payroll data on a state-by-state basis. And what we've seen over the last six weeks. The states who have ended benefits early in June and July. If you strip out Alabama, which has actually seen an outsized increase in claims, increasing by 85% over the last month, continued claims are down just above 13%. And this is not very different than the decline in claims among the September ending states, which are down about 12%. I will also note that we are a bit hesitant reading too much into the claims data. An interesting study from the California Policy Lab came out a few weeks ago, which actually found that 50% of the people that left continued claims in California, March through May, were actually not returning to a job, but they had just used up all of their weeks of benefits. So that means that the decline in claims, we cannot equate that to people going back to work. We do, however, still expect a bump in labor supply when the unemployment benefits come to an end for all states on September 6th. It will coincide with a big back to school movement of all the children going back in person to school, allowing a lot of people that have had to stay at home and not go to work for child care reasons to return to the workforce. And that will altogether be really important for jobs and labor force participation throughout the summer.

Ellen Zentner: Yeah, I think that bump in labor supply is a good point because Chair Powell at the Federal Reserve has talked quite often about expecting that bump up in labor supply as we move into the fall. So before we end here, I want to finally get to the impact of the Delta variant. And so we've seen concerns globally rise recently on would this Delta variant result in renewed restrictions? Is it going to put downward pressure on the outlook?  So what do you see the risks ahead? As for the economic picture around the Delta variant, do households really have this on their radar?

Sarah Wolfe: So we track a couple of different indicators in order to gauge how the Delta variant is impacting consumer sentiment and activity. So far in the U.S., all these indicators are rock solid. Gasoline demand is on the rise and remains elevated. And Google and Apple mobility have not seen any kind of decline the way that we've seen recently in Europe. So from that standpoint, it does not seem to be deterring consumer mobility. On the sentiment side, we do have our own internal consumer survey through our Alpha Wise team, and we've been asking over two thousand U.S. households each month since the beginning of the pandemic what their top concerns are. And covid as a top concern, in the most recent report from just about two weeks ago, showed that it has fallen to an all-time low. And that is already when the Delta variant was growing and spreading throughout the U.S. However, if it does worsen, we could see an increase in self-policing, which could dampen business sentiment. And in an extreme scenario of new restrictions, we could see that wallet share spending, that shift away from goods and towards services that we've seen in recent months, could go back towards goods and away from services. We could also see that if layoffs begin to increase again, that we could see an extension of federal emergency programs, including extending the unemployment insurance supplementary programs past September 6th. But at this point, it does not seem to be a top concern for U.S. households. But we will be monitoring it closely.

Ellen Zentner: Yeah, I think that last point on extending federal emergency programs is important. You know, it's something that thus far, Matt Harrison, our lead analyst for the biotech sector and who's been our principal COVID tracker, he doesn't believe that it will come to that. He is expecting a third wave. But it does seem like we're getting better and better—governments and people—in managing around that risk. So lots to digest here for our listeners.

Ellen Zentner Sara, really thank you for taking the time to talk today.

Sarah Wolfe: It was great talking with you, Ellen. Thanks for having me on.

Ellen Zentner: And thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today. 

Consumer spending has an outsized impact on U.S. economic growth, representing 70% of the economy. We take a deep dive into savings, spending and the labor market.

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