By Christian Messemer, The Stewardship Shepherd

 

If you have ever been grocery shopping and placed too many heavy cans into one bag, I am sure you can relate. You pick up the bags, everything appears secure, and you begin walking to your car. You are out the door then out of nowhere, rip, thud, splat. The bag rips, the contents falls out, and frustration ensues. The extreme shock COVID inflicted upon our economy may be described in similarly blunt terms, “the bottom dropped out.”  In a matter of weeks, states and cities imposed travel and business restrictions. Businesses responded, changing services, reducing hours or closing permanently, millions of Americans lost their ability to earn an income, and the economy stood still. Uncertainty replaced stability.

 

The experience caused many of us to change our spending behavior. For some, the dramatic decline forced our hands. We experienced reduced hours, furloughs, and job loss. With no income, our budgets required drastic spending cuts to stay afloat. For others, job uncertainty persuaded us to tighten our belts to better prepare should our hours diminish or our job finds itself on the chopping block. For all, changes to the ways firms conducted business created an environment where even when we were ready to buy, store closings or reduced hours precluded us from doing so. We all spent less.

 

Spending Decreased, Savings Increased: 

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As Americans cut their spending, excesses went to savings. While the long-term savings rate for Americans hovers around 7.8%, savings rates shot up beginning in March 2020. April 2020 saw the highest savings rate in thirty-nine years. While savings rates have dropped, they remain well above their long-term averages, with July 2020’s rate coming in at 17.28%.

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 Chart One: US Savings Rate January 2019-July 2020

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1. Savings rate is the percentage of one’s disposable income (gross income minus taxes) that is allocated to savings. 

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2. It is important to note that the first stimulus checks from the US government were deposited to many Americans beginning in April 2020. That the savings rate remained high indicates that Americans were not spending the stimulus; instead, placing these additional funds in savings. 

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3. The data for the chart was taken from the Federal Reserve Bank of St. Louis and may be found here: https://fred.stlouisfed.org/series/PSAVERT.  

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The V-Shaped Economic Recovery

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As state and local governments loosen restrictions, the economy will bounce back, driven by consumer spending. If the economy quickly improves, we experience a V-shaped recovery. 

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As Graphic One demonstrates, in a V-shaped recovery, the economy experiences an abrupt decline, eventually bottoming out (the downward slope of the V). After the bottom, there is an increase in economic activity, which quickly brings the economy to pre-shock levels (the upward slope of the V), eventually surpassing them. While we are nowhere near the pre-COVID economic levels, recent gains in the job market and consumer optimism and spending over the past two months suggests that the US is on an upward trajectory. 

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Avoid The V-Shaped Spending Recovery

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When economic news is negative, we go into savings mode to create a cushion against the unknown. As the economic data improves, our confidence returns, and our spending follows. Before we are swept away into a spending recovery, we should take inventory of where we are spending and why. 

 

First, start with some analytics. Look at your spending for the past six months. What areas saw a substantial decline? Are there any that increased? If your budget is anything like mine, you probably saw more decreases than increases. The transition to home living and outdoor recreation reduced our need to drive or eat out, to seek paid entertainment, and to purchase new clothing. More time and people at home caused an increase in utilities and food/housewares spending. 

 

Second, how did these decreases impact your budget? Your emotional state? Spending less in some categories allowed us to sock more money into savings and pay down some accrued medical debt. That felt good. In the beginning, eating-in every day was difficult. I enjoy meeting my wife once a week for lunch. It is a good time for us to connect without the hustle and bustle of home life and kiddos vying for our attention. We adjusted by having a “dine at home” lunch at least once per week. While not the same, a home lunch still allows for quality time, with the added benefit of no bill. Time at home helped me realize that we go out to “go out” more often than I realized. I work from home; one of the dangers of that decision is that if I’m not careful, the house can begin to feel like a prison. After too long, I need to get out, so we all go out together. A favorite of mine is the Tanger Outlets and a Buc-ee’s stop. The downside of going out is that there is always something on which to spend money. Going out with no purpose is a sure-fire way to bust your budget. Our recent homebound life broke me of the “going out” habit. 

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Third, now that restrictions have lessened, have you seen an uptick in spending that was previously low? How would you categorize it? A quick look at our budget would tell you exactly when we felt comfortable leaving the house to shop or eat out. I account for the increased spending in four ways: 

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1. Pent-up demand

2. A return to normalcy

3. Something to do

4. Making up for lost time. 

 

First, pent-up demand is the spending of funds now that you 1) budget for and 2) would have spent earlier but had chosen not to. Why spend the money on back-to-school clothes when your child sits in front of a computer? Why buy work clothes if there is no one to notice the new look? Maybe your spending was a bit larger. Perhaps, you were looking to replacing your car in March but put it off when you no longer had to drive fifty-miles round-trip to work. Pent-up demand is natural, and spending in this area when the economy finally opens will impact everyone’s budget. 

 

Second, returning to normalcy reflects the increase in spending now on items that make you feel everything is getting back to normal. Are you making more coffee runs, scheduling work lunches and social dinners, and returning to paid indoor entertainment? Normalcy is ok, as long as it is in the budget

 

Third, something to do. Now that you can go out, your old routine is looking a little stale. Going for a walk around the neighborhood is not as appealing as walking around a mall. Walking is excellent exercise, but non-budgeted impulse buying is not financially healthy. 

 

Finally, making up for lost time. Many of us have been out of our element for at least four months. A return to spending in ways that we had previously is normal. Making up for the past six months in one weekend is dangerous. Even more so, if you are spending funds you had already used to pay down other debts or increase your savings. Going into debt to make up for what COVID took away is a costly mistake.

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Recap

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As the economy reopens, the question you need to answer is, “Will your wallet?” Times of economic stress encourage saving, while times of economic strength promote spending. For months you have spent less and saved more, and the stats prove it. Before you are swept away by the need to spend, take some time to evaluate what you are spending and why you are spending it. Is it pent-up demand, a return to normalcy, something to do, or making up for lost time? If it is the latter two, do you really want to return to behaviors that you rid yourself of just a few months ago? If not, stand strong, return to the slow-spending status quo of the past five months, and sock that money away like the sky is still falling. Spending is your choice, not the economy’s.

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