Economics Weekly: The Case for a Mini-Consumption Boom

There is an enormous quantity of pent-up savings, fiscal policy was so successful that this is the only downturn in my professional career in which disposable income actually went up in a deep recession, and a lot of that has been saved, and a lot of that has been forcibly saved as people haven’t been able to go out and necessarily spend all that. So if we combine the good news on the vaccine with north of a trillion dollars of accumulated saving, then there is a very very attractive right tail of this distribution [of economic outcomes]. And obviously the odds of that have gone up relative to where we were before the vaccine news.

— Fed Vice Chairman Richard Clarida, November 16, 2020

This week’s retail sales data was interpreted by the market and many analysts as being somewhat disappointing, in that sales only increased by 0.3%, where expectations had been for a 0.5% increase. Given what has also been a huge surge to the upside in economic surprises over the last six months, it is possible that many have simply been getting too comfortable with the macro data coming in above expectations. Nevertheless, while there is still plenty of work to be done, we continue to see a steady positive recovery in households’ situations, and as Vice Chairman Clarida points out in the above quote, the combination of higher savings and a vaccine encouragingly means that the probability of a more positive economic outcome has increased.

In this week’s Economics Weekly, we examine the consumers’ situation, and conclude that while we still have a steep hill to climb in the coming months with regard to the pandemic and the scarring that it leaves, there is a growing case to be made that households in aggregate will emerge in the spring with stronger balance sheets and considerable pent-up demand.

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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.