The second quarter of 2020 resulted in the worst single quarter of GDP loss in the nation’s recorded history, with the economy contracting by 9.5%. Although that loss was actually slightly less than what experts expected, a second week of rising unemployment claims coupled with the Bureau of Economic Analysis report release left investors spooked. But buried in the bad news was a hint of good news with the potential to be truly extraordinary news: Personal savings in the second quarter exploded, meaning we might post epic spending in our third-quarter report, which will depict the time most of the nation began to reopen.
Personal savings tripled from $1.59 trillion in the first quarter of this year to $4.69 trillion in the second. The personal savings rate soared to 25.7% from 9.5%, meaning that even as incomes increased from the first quarter to the second, in large part due to government benefits, spending didn’t. Given the stark drop-off of spending on services versus the relative stability of spending on goods, it seems that these savings came not from a lack of consumer demand but rather because the shutdown left consumers with nowhere to spend their money.
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After all, if you’re stuck at home and everything’s closed, you’re saving quite a bit of the money you’d usually be spending on dinner, haircuts, nights out on the town, gym memberships, and movies. And with nowhere to go, expenditures on clothes and shoes plummeted. Furthermore, 7.5 million people who didn’t have jobs at the end of April were employed by the end of the quarter. That’s a whole lot of people who would have been wise to save excessively in case they didn’t get their jobs back or find new ones, and our third-quarter earnings will reflect their spending habits after they become financially secure again.
Our third-quarter report will reflect all the stir-crazy parents who finally went on date nights again, patients who finally got to get a physical or see the dentist again, and young folks who finally got brunch with their friends again. We won’t know for sure until October’s report comes out, and if unemployment claims increase and federal coronavirus funding expires, we could have a lot of warning before then that spending won’t carry us to significant third-quarter growth. But it’s a bit of good news in a time of a lot of bad, and a reminder that just like before the pandemic, this economy remains consumer-powered.
