The American Consumer Is Flush With Cash After Paying Down Debt

Eight months into the pandemic, many Americans’ household finances are in the best shape in decades.  This may seem like a surprising statistic given the current climate and after the widespread business lockdowns earlier in the year which coincided with a surge in unemployment. While this certainly doesn’t apply to all families equally and we know this has been an economic low point for many, it points to just how strong the U.S. economy was going into the virus outbreak, and how powerful the combined monetary and fiscal response was from the Federal Reserve, Congress and the Trump administration.

During this time we saw record-low mortgage rates, reflecting the ultra-easy Fed policy that has prompted a steady wave of refinancing and allowed homeowners to reduce monthly payments or tap equity. Americans are also holding more cash, helped in part by stimulus from the government.

Households’ debt service burdens have eased considerably, too, a complete departure from the 2007-2009 financial crisis that required years to mend. That in turn bodes well for consumer spending and its ability to power the economic recovery through a period marred by a violent spike in virus cases.

Despite the surge in Covid-19 cases, economists project a 4% annualized rate of U.S. economic growth this quarter, unchanged from the October forecast — though down from the prior period’s record gain, according to a Bloomberg survey. While the pandemic has financially been harder on working-class families than the wealthy ones who have been stockpiling much of the cash, data shows that they too have more money in the bank now. That’s important because they are much more likely to spend that money — and give the economy an added jolt — than the rich are.

Checkable deposits were also improving for several quarters leading up to the pandemic and even before the government actions to provide financial assistance for the unemployed. However, the virus resurgence means “people can’t spend until it’s safe to go back out again.”

To be sure, another reason savings remain elevated is that people are uneasy about their jobs and the outlook, particularly in industries such as travel, food services and leisure, where business activity is more at risk.

While “cash buffers” of those who benefited from fiscal stimulus are starting to weaken, their financial positions remain elevated compared with pre-pandemic levels, JPMorgan’s Lake said. “I think there’s enough juice to get people to year-end.”

For its part, residential real estate has played a huge role in driving both the recovery and improvement in household finances. Cheaper borrowing costs have not only sparked a flurry of demand for homes, mortgage refinancing has strengthened. While cash-out refinancing only makes up a little more than a third of all activity, a larger share of rate-term refinancing means lower monthly mortgage payments. With these lower payments due to refinancing, it assumes us to believe people will continue to spend more money relatively. 

In conclusion, it seems as though a great deal of consumers entered this pandemic in a strong position, with a great deal of cash, which helped some who were hit hard by the virus. Its interesting to see how even after 8 months of lock-downs and regulations, the household finances are still stronger than they have been in a long time. It’s important to take advantage of situations listed above, especially refinancing, to help lower payments and in turn pile up your cash account. If you have any questions or want to discuss your portfolio or finances, please reach out to us at info@shermanwealth.com or schedule a complimentary 30-minute meeting here.

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