A Harvard research study says the wealthly are not spending and its having a negative affect on the economy

 In consumer spending

An article in NPR recently reported that the upper income households have not been spending as as freely as their lower income family counterparts have been spending on essential goods in the past few weeks as things have begun to open up. And according to the NPR contributor “that decline in spending by the wealthy could limit the whole country’s economic recovery.”   

So the article’s data is based on research conducted from a Harvard economist Opportunity Insights Economic Tracker project that uses credit card data to track and analyze spending habits. Their chart titled “Spending Recovery Lags for High Income Households” has been tracking the economic impacts of COVID-19 on people, businesses, and communities across the United States in real time.  The research noted “while spending has rebounded over the last 2 months, especially for low-income households, spending among high-income households remains considerably lower than pre-COVID-19 levels and appears to be connected to perceived health risks.”  And if you look at the line graph chart starting from before the Covid-19 hit, the upper income spending is down by 17%.   

covid-19-spending-linechart.

(image credit: tracktherecovery.org)

The research also found that people at the bottom of the income ladder are now spending nearly as much as they did before the coronavirus pandemic.   

The NPR article spoke to Nathan Hendren, a Harvard economist and co-founder of the Opportunity Insights research team and he stated “when the stimulus checks went out, you see that spending by lower-income households went up a lot.”  He went to also note that the wealthy are not matching them, “for higher-income individuals, that spending is still way far off from where it was prior to COVID and it has not recovered as much.”  

That’s potentially damaging for the recovery because consumer spending is a huge driver of economic activity. In fact, so much of the country’s economy depends on shopping by the top income bracket that the wealthiest 25% of Americans account for fully two-thirds of the total decline in spending since January.   

The rich are holding back on spending because they don’t have money though, by and large, they have lost fewer jobs and aren’t the ones who are worried about making rent.   

The NPR article mentions that they have a lot of discretionary income and before the pandemic were spending a significant chunk of that going to nice restaurants, the theater, or traveling and staying in nice hotels. Those are precisely the things that have been off-limits since the coronavirus hit.   

 

Savings Rate 

savings

(Image credit: Bloomberg)

According to recent reporting from a Bloomberg article titled Americans hold huge piles of cash that is key to the economic recovery noted that  “in April, the U.S. personal savings rate — the percentage of disposable income that households manage to sock away — jumped to 32.2%. Before Covid-19 in records that date to 1959, that number had never exceeded 17.3%, and had cleared 10% only once since 1995.” Fresh monthly data from the Commerce Department Friday showed the savings rate subsided to the still-lofty level of 23.2% in May. 

This is Not a Normal Recession   

The NPR contributor points out that is what makes this “very different from an ordinary recession”, when spending on higher-touch services doesn’t dry up so quickly. And those experiences are usually a lot more expensive than food and other essential items, which the rich and poor alike have continued to spend on, but also make up a smaller portion of upper-income household budgets.  What is also interesting to note is the Harvard economist team uncovered that businesses that deliver in-person services in wealthy neighborhoods have seen the biggest drop in sales and are struggling to recover, while a retail store or takeout restaurant in a poorer neighborhood might have seen some decline but is starting to come back now.     

Recently the Fed Reserve chairman Jerome Powell stated retail sales bounced back in May after a steep drop in March and April, and these improved numbers are evidence that governments’ stimulus efforts to prop up the economy are helping. During a Senate Banking Committee in mid June, Powell also cautioned that businesses that rely on delivering personal services may not recover anytime soon.    

People that rely on income from working in high-end restaurants or service oriented businesses. Hendren’s team found big job losses specifically among workers, many of whom don’t make a lot of money but who worked in high-income neighborhood areas.  

Many of those jobs may not be coming back anytime soon. And because it’s not a lack of money that’s keeping the rich from spending, the usual tools the government might use to fight a recession are not terribly helpful here.  The Harvard economist stated “from the perspective of people who are not living paycheck to paycheck, the main concern here is really fighting the virus.”  Obviously “unless we remove the threat of getting sick or getting your family members sick, it’s hard to imagine that that spending will recover to the pre-COVID levels,” Mr Hendred said.”    

Conclusion 

Since a vaccine or effective therapy for the virus could be a year or more away, both Powell and Hendren suggested that people who have lost jobs in those businesses may need additional help from the government. And the government support for the unemployed is likely to at least shrink at the end of July when benefits approved under the CARES Act expire.“There are going to be an awful lot of unemployed people for some time,” Powell cautioned.

And as the Bloomberg article points out, we will have to see if there is something worse such as “lost demand” from the constantly re-emerging virus, that causes fear and uncertainty to alter consumer behavior in a lasting way. Instead of spending their reserves even when the coast is truly clear, households may think twice and turn involuntary savings into more permanent, precautionary savings. 

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