The Pulse

The Pandemic has Transformed Americans' Spending...

…and hopefully Americans’ savings habits too

Niagara University’s Dr. Tenapo Lee writes on howCOVID-19 may be altering consumer attitudes toward money.

The Pandemic has virtually transformed every aspect of Americans’ lives.

More than 90% of the population have been ordered to stay home. Non-essential retail outlets are closed. Restaurants are open for take-out and many businesses are suffering because people are not out.

They’re not using their cars; they’re not using mass transit and they’re not even going out for coffee. Those who provide transportation/travels hospitality (hotels and restaurants), entertainments/sports, and other non-essential products are suffering. On the other hand, Americans have spent more on groceries, work/play-at-home gadgets, and medical products via e-commerce in recent months. The service sector, representing 80% of the U.S. economy has been severely hurt because services are elastic, intangible and cannot be stored.

Consequently, the unemployment rate has escalated quickly to 13% with 22 million people, approximately the entire population of New York State, out of work. Many have been either laid off or furloughed without any income to pay their bills.

Meeting Financial Obligations

Before March 2020, Americans saved an average of 8.2% of their disposable income. That amounts to about one month of their annual spending. We don’t know when the pandemic, which caused shutdowns beginning in early March, will allow the reopening of our economy. It is very likely it will last more than two months, bringing us to the middle of May.

That means many Americans, now having difficulty meeting their financial obligations (mortgage/rent, basic needs such as utilities and groceries) will continue to suffer. Many food banks are operating beyond their capacity and seeking donations. Americans who never envisioned themselves in such a position, find that they are in line at a food bank. It is a shocking phenomenon that “hungry” is becoming at least a temporary issue for the most developed country in the world in the 21st century.

American life, post-pandemic,will be quite different in many ways, and that will likely – and should – include a change in their savings habits.

In macroeconomics, we know that consumer spending accounts for approximately two thirds of the GDP. Your spending will be others’ income. Hence, more spending would accelerate economic growth (higher GDP) through the so-called “expenditure multiplier” effect.

But, this is inconsistent with the goals of microeconomics, as individuals must save money to prepare for the future – emergencies, an unexpected layoff, a sudden health problem or a plan to retire.

Before March 2020, Americans saved an average of 8.2% of their disposable income. That amounts to about one month of their annual spending...

In addition, a higher savings rate for Americans will help lower public debt and ensure that the U.S. dollar will continue to be the only global currency to provide credit to the rest of the world.

Will Americans learn a lesson and begin to save more in the post-pandemic era? How much should Americans save in their bank accounts? Does it make sense for Americans to save 15%, rather than current 8.2% of their disposable income? Nobody knows the answer as each individual will vary, as each country varies. The savings rates of Germany, Japan, and China were 11.2%, 28.3%, and 36.1%, respectively in March 2020.

 

 

 

About Tenpao Lee, Ph.D.
Dr. Lee is a full professor of economics at Niagara University. He earned his Ph.D. in economics from Iowa State University. He was a Fulbright Scholar to Taiwan in 2001 and a Fulbright Senior Specialist from 2002 to 2009. In 2013, Dr. Lee was named as a Distinguished Visiting Research Fellow by Jianghan University in Wuhan, China. In 2015, he was awarded the title of “Shanghai Distinguished Oversea Professor” by the Shanghai City Government, China. In addition to business statistics, Dr. Lee has taught supply chain management at both the undergraduate and graduate levels. He also developed a study abroad program to Asia that includes China, Taiwan and Japan. Dr. Lee’s research focuses on the impact of globalization on the economy. He was the editor of the International Journal of Intellectual Property Management.
Niagara University
Founded by the Vincentian community in 1856, Niagara University is a comprehensive institution, blending the best of a liberal arts and professional education, grounded in our values-based Catholic tradition. Its colleges of Arts and Sciences, Business Administration, Education, and Hospitality and Tourism Management offer programs at the baccalaureate, master’s and doctoral level.