The arrival of $1.9 trillion, can the 'money shower' still drive the stock market up?

Author: Matthew C. Klein from Barron Weekly

Editor | Guo Liqun

Editor's note: On March 11th local time, President Biden signed a new $1.9 trillion COVID relief bill at the White House, providing $1400 in relief funds to eligible Americans. Biden said, "This historic legislation is a crucial step in rebuilding the USA, giving the American working people, middle class, and those who build this country an opportunity to strive."

After studying the relevant data, Barron's found that the US government's previous "money printing" did increase Americans' deposits, but due to uneven distribution, it did not provide much boost to overall consumer spending in the USA. Another round of economic stimulus measures involving money printing may also not contribute much to the upcoming economic recovery.

During the COVID-19 pandemic, the US government distributed checks to Americans in home isolation as subsidies.Due to a decrease in consumer spending on services, coupled with the $1.2 trillion economic subsidy previously issued by the government,As of January this year, Americans' savings have increased by around $1.8 trillion compared to the situation without the epidemic.。

Americans' savings increased by $1.8 trillion more than when the epidemic did not occur.

Black line: actual personal savings of Americans; Green line: savings without the epidemic situation.

Data source: U.S. Bureau of Economic Analysis, Barron's calculation.

At the same time, stocks and property prices have risen significantly. The net effect of these phenomena is,The total net assets of American households have increased by around $14 trillion compared to the end of 2019.。

Some economists had been concerned that once widespread vaccination drives society back to normalcy before the pandemic, an excessive amount of money could stimulate a surge in demand for scarce commodities and services, potentially leading to an overheated economy. However, this scenario may not materialize, as a careful observation of the actual destinations of this extra cash may reveal that these surplus savings might only provide a temporary boost to post-pandemic consumer spending frenzy, rather than causing sustained significant price hikes.

There are mainly two reasons for this conclusion.Firstly, compared to non-liquid assets such as residences and real estate, money held in bank accounts is more likely to be spent; secondly, individuals with the highest incomes are less likely to spend windfall gains acquired in one go, compared to those with lower incomes.。

The most detailed data currently comes from the data of the 'Distributable Financial Accounts' released by the Federal Reserve, which tracks the asset-liability situation of U.S. households of different income levels over a period of time. From the end of 2019 to the end of the third quarter of 2020, total net assets of U.S. households increased by $5.2 trillion, with $2.3 trillion coming from bank deposits, money market funds, stock investments, and other liquid assets (such as cash accounts opened at brokerages), which can be spent immediately. Approximately $1.2 trillion of U.S. household net assets came from the rise in stock prices, while the increase in home equity contributed $1 trillion to the net assets of U.S. households. Spending on autos, furniture, electronics, appliances, and other durable goods by Americans contributed approximately $300 billion to household net assets.

The Federal Reserve last released this data in September 2020, but since then, the U.S. stock market has risen by about 20%, and total household net assets have increased by approximately $7 trillion. Home prices have also risen by about 5%, increasing homeowner home equity by around $1 trillion. Total deposits in the banking system have grown by nearly $700 billion, although some of this is additional liquidity obtained by businesses rather than consumers. Credit card debt has been reduced by over $100 billion.

Since 2020, American credit card debt has been reduced by over $100 billion.

Data source: Federal Reserve, Barron's calculations.

So, who has more cash to spend? The Federal Reserve said,From the end of 2019 to the end of September 2020, about 28% of the increase in liquid assets flowed to the top 1% of Americans, 70% flowed to the top fifth of Americans, and only 14% (330 billion out of 2.3 trillion US dollars) flowed to the bottom 60% of Americans.。

Since the Federal Reserve compiled this data, the distribution of liquid assets may have become even more distorted, with most Americans likely having less idle cash on hand. Last summer, after the government stopped income subsidies, many Americans had to use their accumulated savings from earlier in the year to maintain expenses. Economists at JP Morgan Chase found that since last September, the lowest income quartile, the most representative Americans, had spent nearly one-third of the money in their checking accounts. In fact,By the end of last year, apart from the highest-income segment, most Americans had less funds in their checking accounts than in the third quarter.。

Ownership of stocks is extremely concentrated, so most of the profits flow to those who already have enough cash to meet consumption needs. Although the profits from rising house prices are distributed more evenly, they are unlikely to significantly boost consumer spending. Economists found after studying historical data that consumers often spend about 5% of home equity gains, but in the years before the outbreak of the epidemic, this 'wealth effect' was close to zero, to some extent due to stricter mortgage standards after the financial crisis.

For middle and low-income Americans, the fastest-growing wealth category is durable goods, but this only reflects their contribution to the consumer recovery, rather than an improvement in their financial situation enough to support future spending.

Based on income levels, the contribution percentage of different income groups to the net worth growth of American households

(2019Q4-2020Q3)

Data source: Federal Reserve, Barron's calculations

Therefore, Goldman Sachs' Joseph Briggs and David Mericle estimate that with the help of the government's new round of economic support, even though the total amount of 'excess savings' could grow by 50% from now until mid-2021,Only about 18% of this money will be spent on purchasing goods and services after the economy fully reopens, with the remaining money likely used by higher-income individuals for investing in stocks or property, and by middle and low-income Americans to establish the cash reserves they need.。

Therefore, although the new $1.9 trillion economic stimulus plan is distributing $1,400 checks to most Americans,The idle cash held by Americans may only contribute about 2 percentage points to GDP growth in 2021, although it can help with economic recovery, its impact is very limited.。

Translated by Zhang Rina

Original article from Barron's China, not to be reproduced without permission. The English version can be found in the February 28, 2021 report "Americans Are Sitting On Lots of Spare Cash. It May Not Boost Growth Much." (This article is for reference only, investment advice does not represent the opinion of Barron's; the market has risks, investment should be cautious.)

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