August 01, 2021
An important item in the GDP report released this week, that received little attention, is that the saving rate is still well above the pre-pandemic level. For the second quarter as a whole the saving rate was 10.9 percent. If we just look at the month of June alone, the last month in the quarter, the rate was still 9.4 percent. This compares to an average saving rate of 7.5 percent in the three years prior to the pandemic.
For those not familiar with this economic concept, the saving rate is the percent of after-tax income that is not spent. To be clear, not spent means literally that people did not use it on consumption. If they used their income to pay for rent, buy a car, pay for their college, this would all be counted as consumption.
By comparison, if they put their money in their checking account or savings account, bought a government bond or shares of stock, this would be counted as saving. It would also be counted as savings if they used some of their money to pay down credit card or student loan debt.
Saving doesn’t even have to involve a conscious decision to put money aside in some way. Someone may cash their paycheck and have $1,000 sitting around their house, which they plan to spend, but have not done so yet. This would also count as savings. Savings just means after-tax income that is not spent on consumption.
There are two reasons this rise in the saving rate is a big deal. The first is that it indicates that the money the government paid out over the course of the pandemic is not now leading to a big surge in spending. There have been economists, most notably former Treasury Secretary Larry Summers, who have argued that the Biden recovery package was so large that it was likely to set off a wage-price inflationary spiral comparable to what we saw in the 1970s.
A big part of that story was that the money many households accumulated, as a result of the government payments made over the course of the pandemic, would lead to a huge surge in spending once the economy had recovered. While it’s still early, and the threat of the pandemic is still present, the vast majority of businesses have now reopened and most pandemic restrictions have been removed in most areas.
The fact that we are still seeing a saving rate that is well above the pre-pandemic level goes against the view that people would rush out and spend as soon as they had the opportunity. If we did see this flood of spending it would mean that the saving rate is below its normal level, that would mean that it would have to be considerably below the 7.5 percent rate we were seeing before the pandemic, rather than being almost 2.0 percentage points higher, as was the case in June.
A higher than normal saving rate also implies that there will be a gap in demand that needs to be filled by some other component of GDP, such as increased government spending, if the economy is to operate at close to its full employment level of output. In this context, a large government deficit may be essential for supporting demand.
Of course, the story may be different in a couple of months. Perhaps people still feel uncomfortable about going to restaurants, seeing movies, or engaging in other activities that could expose themselves to infections. If that’s true, we may still see the flood of spending, but it will take place a bit later than we might have expected, but for now, the data don’t support the huge spending surge story.
How the Pandemic Changed the Economy and Society
The other interesting issue in the latest consumption data is that it may provide us with more insights into the post-pandemic economy. We know that many more people worked from home during the pandemic than had previously. In many cases, businesses are now putting in place their plans for operating in a post-pandemic world. This will surely include more opportunities for people to work from home, although obviously fewer than at the peak of the pandemic.
Consistent with this story, spending (all figures are adjusted for inflation) on services in June was still 2.6 percent below the pre-pandemic level. By comparison, spending on durable goods (largely cars) was 23.8 percent higher and spending on non-durables was 12.4 percent above its pre-pandemic level.
The services where we see the sharpest falloffs are not a surprise. Spending on transportation services were 20.6 percent below their pre-pandemic level in June. Air transportation was down 24.8 percent, while spending on forms of transportation associated with commuting, such as busses and taxies, was down even more, with declines of close to 50 percent.
We will likely see air transportation rise back towards its pre-pandemic level as people come to feel more comfortable about flying, but much of the falloff in spending on commuting is likely to be permanent. (Spending on gas [gallons purchased] was 2.2 percent below its pre-pandemic level.) Consistent with the decline in commuting, spending on dry cleaning was 2.8 percent below its pre-pandemic level.
Spending on child care is down 21.7 percent. This is partly due to less commuting, but also in part due to less supply, as many child care centers closed in the downturn. The Biden administration is trying to make increased federal support for child care a priority. If additional funding does come through in the bills currently before Congress it will likely mean a large increase in usage, even above pre-pandemic levels. This would be the case even if we continue to see an increase in working from home. There are many parents working from home who would still welcome child care for at least part of the day.
Interestingly, spending on restaurant meals overall (including food at colleges and K-12 schools) is up 3.5 percent from before the pandemic. This indicates that any reduction in restaurant meals by people who used to work in offices or other places, is being offset by an increase in meals purchased by people who are not commuting.
This increase is also striking because restaurant employment is still 10.3 percent below the pre-pandemic level. This indicates a large increase in productivity at restaurants. Part of this story is likely an increase in the percentage of carry out meals, although many employers may have found ways to use their staff more efficiently.
Spending at hotels and motels is still down 21.9 percent. This presumably reflects both fears about the pandemic and also that people had not planned trips for the month. Spending on housing at schools was down 44.7 percent, reflecting the fact that many schools did not have in person classes this spring.
Spending in the category of recreational services, which includes live music, movies, sports events, and a variety of other activities that were largely shut down during the pandemic, was still down 19.2 percent. This likely reflects the fact that many of these venues had not fully opened by the start of the month. One notable exception is casino gambling, where spending is up 8.5 percent. We will probably need a few more months to see what the longer-term post-pandemic picture is likely to be in this area. In some cases, such as movie theaters (spending was down 83.1 percent), behavior patterns may have been permanently altered by the pandemic.
Spending on health care services, which accounts for more than 15 percent of consumption expenditures, was still down 4.1 percent in June. This primarily reflects people still putting off non-urgent care. That is best seen in the case of dental services, where spending was down 11.9 percent from the pre-pandemic level.
The other, more dismal, outlier in this sector is nursing homes, which also had an 11.9 percent decline in services. This likely reflects many patients leaving the care of nursing homes because they or their families feared for their well-being. It also reflects the fact that many nursing home residents died from the pandemic.
It seems clear that in many areas of consumption we were still very much seeing the impact of the pandemic in June. We will have to see how consumption patterns change when the case numbers fall back to levels where the pandemic is no longer a major concern. Some important changes may not be clearly visible in the GDP data. For example, the replacement of in-person university classes by remote learning will not be immediately apparent in the data. The increased use of tele-medicine also will not show up in GDP data. But it is likely that many consumption patterns will be permanently altered by the pandemic.
Productivity in the Pandemic
One hugely important point that has not gotten nearly enough attention is the sharp uptick in productivity since the pandemic began. GDP in the second quarter was 0.8 percent higher than in the fourth quarter of 2019. On average, we had 4.4 percent fewer people employed in the second quarter of 2021. If there was no change in average hours worked, that would imply an increase in productivity of more than 5.0 percent, almost 3.4 percent on annual basis.
Of course, there was some increase in average hours and other factors, like the self-employed and the government sector, which complicate the calculation. However, productivity clearly grew far more rapidly than the 1.0 percent annual rate for the decade prior to the pandemic.
This is a huge deal in the context of inflation fears. The 1970s stagflation was associated with a sharp slowing in the rate of productivity growth, from an average annual rate of 3.0 percent in the period from 1947 to 1973, to just over 1.0 percent from 1973 to 1980. If we can sustain even a modest uptick in productivity growth from the pre-pandemic pace, it will go far towards eliminating the risk of inflation.
It’s also worth noting the latest GDP data, which include the comprehensive revisions to data from 2019 and 2020, shows a sharp increase in the profit share of corporate income in the first quarter of 2021. The profit share rose to 25.5 percent in the first quarter of 2021, compared to an average of 23.9 percent in 2020.
This rise in profit shares goes directly at odds with the idea that excessive wage growth will lead to higher prices, producing a wage-price inflationary spiral like we saw in the 1970s. In the 1970s, the profit share of income fell.
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