It was a curious recession that the US economy suffered in the spring of 2020 – an unprecedented collapse in activity, an equally historic surge in unemployment, but after this shock, American households (and not just Jeff Bezos) have seen an increase in their wealth and a surge in their liquid savings. This savings mattress comes from overcompensating for lost earnings from work, a phenomenon that ended in July. The health situation remains uncertain, but nothing justifies such a high savings rate. The dissaving should help support the recovery in the coming months.
With the shock of the coronavirus, nothing is unfolding following the ordinary script of economic crises. We are dealing with the most severe and the shortest of recessions. The same can be said of the stock market crash, 23 days to lose 33%, then three and a half months to exceed the previous peak. The result is that the aggregate measure of household wealth recorded its largest decline in history in Q1, with a decline of 7 trillion (-6%) or the equivalent of 40% of their annual disposable income.1. This correction exceeds in intensity what happened during the financial crisis of 2008, but over a shorter period. At the time, household wealth fell by 11 trillion from Q3 2007 to Q1 2009, almost a year of disposable income.
The other big difference with the financial crisis is the state of the asset markets. This time, there was no excess in the real estate market and this sector even appears to be one of the most dynamic. Before the shock, the rise in house prices tended to slow down; this phenomenon could be reversed in the short term, which would increase household assets. For its part, the stock market has passed new highs in a context of ultra-low rates and the assurance that the Fed will not raise them on the visible horizon. In Q2, we estimate that household wealth has regained all the lost ground (graph).
Not only are US households richer, but they have an unprecedented amount of liquid savings, which can therefore be used quickly. Thanks to public transfers, the outstanding current accounts increased by $ 1.4 trillion, a jump of 60% since the start of the year (graph).
Under these conditions, it should be possible to compensate for the cessation of support measures. In August, credit card transactions did not decline. However, two factors can affect the pattern of consumption. The first is the sensitivity of spending – and therefore the desire for precautionary savings – to health uncertainty. The second relates to disparities between households. Those with the greatest propensity to consume are also those most exposed to cuts in government transfers.
Monetary and fiscal policy
During his speech at the annual Jackson Hole meeting, Jerome Powell (finally) unveiled the new formulation of long-term objectives for monetary policy strategy.
Let us first note that the mandate remains twofold, aiming at maximum employment and price stability. Concerning the first mandate, the Fed will analyze the “employment deficit compared to its maximum level” and not as previously the “deviations” compared to this level. The difference may seem subtle, but it shows that the Fed doesn’t have to worry about very low unemployment as long as it doesn’t lead to cost and price pressures. Under this new formulation, the cycle of key rate hikes in 2017 and 2018 would not have been justified.
Regarding the second term, the Fed indicates that its inflation target of 2% will be judged “over time”. This formalizes a regime ofaverage inflation targeting where, if inflation has persistently been below target (it has been), then monetary policy should aim for above target inflation. The Fed specifies that this overrun must be “moderate”, without further clarification, because it intends to retain broad discretion in the assessment of possible inflationary risks in the future. We can think of this as an inflation of around 2.5% for a few quarters.
Finally, the strategy review does not include any element of “controlling the yield curve” by setting long interest rate targets. Recent speeches had shown unambiguously that the Fed sees more disadvantages than advantages in this tool. In short, none of Powell’s announcements come as a surprise, but it gives more weight to the clearly accommodating bias displayed by the Fed and signals that over the horizon of the Fed’s monetary policy projection (2-3 years), no rate hike is likely. The strategy review will now be repeated every five years, with changes if necessary.
To be continued this week
The 4 September, the BLS will release the monthly labor market report for August. The evolution of weekly employment indicators over the past few weeks signals a further moderation in employment gains.
The other important statistics of this re-entry are the ISM surveys in the manufacturing sectors (the 1is) and non-manufacturing (the 3). The 2, the Fed will release the Beige Book in preparation for the September 16 FOMC meeting.