Not all that long ago, we were hoarding toilet paper and flour — eyeing the proverbial rainy day when we’d need what we’d saved, as the coronavirus upended daily life.
The same uncertainty, to hold onto what we’ve got while facing a hazy future, is now evident in consumer spending data, with negative ripple effects for the small- to medium-sized businesses (SMBs) that depend on them for survival.
As the data released by the U.S. Department of Commerce last week show, consumers held onto their purses and wallets — digital and tangible ones — even as their incomes got a (temporary) boost.
In terms of the headline numbers, personal income was up by 10.5 percent in April, given a tailwind of $3 trillion in stimulus spending, although $1,200 payments tendered through direct deposits and paper checks, and $500 payments for children. A temporary boost to unemployment insurance, at $600 a week, have also increased incomes.
At the same time, consumption was down by 13.6 percent.
Take those two data points together, and the result is a soaring savings rate, at a historic level, at 33 percent and leagues above the 12.7 percent seen in March.
The backdrop is a stark one, where Labor Department estimates show 2.1 million additional workers filed for unemployment last week, bringing the two-and-a-half-month tally to more than 40 million people filing for unemployment insurance.
The ripple effects are ominous ones for the U.S. economy, and specifically, for SMBs that have been hanging on by a thread as they navigate new ways to try to get consumers to keep spending.
It follows that a massive slide in consumer spending means that we’ll see a massive hit to gross domestic product (GDP), where, as The New York Times reports, economists see GDP sliding by 40 percent or more in the current (second) quarter.
Drilling down a bit, we can see where the pockets of disruption and turbulence lie. Friday’s report from the Commerce Department showed that spending on durable goods was off by 17.3 percent — generally regarded as big ticket items such as cars and washing machines (to name just two examples). And non-durable items, such as clothes or services like doctor’s visits, were off by a respective 16.2 percent and 12.2 percent.
Conventional wisdom may hold that having more savings in place means that individuals and families will draw down on those banked funds as states reopen and merchants that have so far been shuttered for weeks — such as retailers, barbers and restaurants — take tentative and staggered steps to lure shoppers back.
There’s at least some indication that we may have reached a nadir, at least in terms of psychology, and psychology is what drives spending. The University of Michigan reported last week that its measures of consumer sentiment were up slightly in May, as measured against April, to 72.3 percent from 71.8 percent. There’s a long way till we get to anything resembling past levels, as these readings are 20 points below 12-month averages.
But there’s another data point that should give pause to the idea that, somehow, having a savings buffer will be enough to turn that sentiment into spending. During the same month of April, wages were down 8 percent, a casualty of job losses and pay cuts.
As we noted in this space back in April, as many as 60 percent of U.S. consumers live paycheck to paycheck. April seems long ago, and job losses have mounted week by week. But even back then, we found that almost half of consumers had $2,500 or less in savings — most acutely felt by consumers making less than $50,000, where 69 percent had that threshold (or less) saved up. This group has been massively affected by the layoffs, as the Federal Reserve reported in May that 40 percent of lower income Americans lost work amid the pandemic, while only about 13 percent of earners above $100,000 were similarly impacted.
In the meantime, the loss of wages whether by job losses or trimmed paychecks means that triage becomes important when deciding to, for example, keep the lights on and food on the table versus buying toys, clothes or going to the movies. Saving those income boosts then becomes the fallback strategy, which seems logical (and prudent).
But if saving ramps up, the signals are ominous ones for the SMBs that, in turn, might conceivably hire workers back and pay wages, if only they could get their top-line momentum back (which in turn relies on consumer spending).
As PYMNTS reported in May, almost 60 percent of SMB retailers say they might not have enough cash on hand to survive the economic ravages of the pandemic. However, most SMB owners expect the pandemic to last at least 99 days. There’s a tightrope balancing act here, as those same firms stated that they believe the government’s financial aid could keep them open 95 days.