How does the buildup of unused cash affect the near-term outlook for consumers?
In spite of the lingering COVID-19 pandemic, American consumers appear to be on strong financial footing. As we noted in a previous piece, the personal savings rate skyrocketed to nearly 35% at the onset of the pandemic, and while it has since fallen to under 10%, consumers are still saving more than they were before the pandemic began.
High savings rates coupled with government stimulus payments, expanded child tax credits, and enhanced unemployment benefits allowed consumers to build cash balances at an unprecedented rate. As shown in the chart above, total cash and checking account balances on consumer and nonprofit balance sheets roughly tripled from around $1 trillion in late 2019 to more than $3 trillion as of the most updated data from March.
Today’s high cash balances provide an additional, substantial source of support for consumer spending and investment over time. As conditions gradually return to normal, that excess cash is likely to be drawn down to fund additional spending and investment. Meanwhile, the employment market continues to recover, although not without some challenges. Record job openings and an uptick in wage growth should continue to benefit consumers as more individuals fill those job openings.
The significant amount of cash available to households shouldn’t only support spending but could also act as an important source of capital for investment when the inevitable bout of market volatility eventually occurs.
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