New Consumer Behavior may dictate US recovery
by Naagesh Padmanaban on 31 Dec 2020 0 Comment

Now that the vaccines for the deadly Covid-19 virus are in place, there is expected relief all over. The big question in the minds of most is how quickly will America get back on its feet? This is a fair question, but the answers may not be straight forward. At least if we go by extant data. A few important reports published recently may provide some insights on the course of the recovery. It is worth examining them in a bit of detail.


Firstly, data published by the Federal Reserve (December 21, 2020) from the findings in the Survey of Consumer Expectations (SCE) Credit Access Survey points to some key consumer behavior patterns that may impact recovery of US economy [Credit Access Survey Shows Plunge in Credit Demand and Access: Federal Reserve Bank of New York (


The Survey reveals the impact of COVID-19 on consumer credit markets. Application rate for consumer credit (loan) fell from 45.6% in February to 34.6% in October, revealing a sharp decline in demand as a result of the pandemic.


In addition, a Federal Reserve Bank report shows a decline in existing consumer loan balances (credit outstanding) by $101.03 billion, from $854.85 billion in March 2020 to $753.82 billion in December 2020. [Consumer Loans: Credit Cards and Other Revolving Plans, All Commercial Banks (CCLACBW027SBOG) | FRED | St. Louis Fed]


The decline in credit – application for new loans as well as existing loan balances – may be good news for borrowers, but is definitely a bitter pill for the banks. This is because lower loan balances and fewer new accounts (loans, credit cards etc.) mean lower profits and could impact the bottom line of banks as early as H2 of 2021.


The next piece of data that is of interest is the US savings rate published by the US Bureau of Economic Affairs (BEA). The BEA defines personal savings rate as personal saving as a percentage of disposable personal income. In other words, it’s the percentage of people’s incomes left after they pay taxes and spend money.


US savings rate was at a high of 12.9% in November 2020, down from a never seen before high of 33.7% in April 2020. This new consumer frugality is widespread among consumers – seen across all credit risk profiles, demographics and economic fortunes.


The moot question then is what are the insights that these key data items offer us vis-à-vis the US economic recovery?


As is well known, consumer spending is the engine of the US economy. Given the uncertainties caused by the pandemic, consumers may be inclined to be frugal and save rather than spend. If the consumers’ propensity to save remains high, then key economic sectors like restaurants, hospitality, travel and other related segments will continue to be under pressure and many would never reopen. Consequently, savings rate will be a metric that experts will watch closely.


On the other hand, the decline in demand and appetite for credit, declining loan balances and high unemployment in many sectors of the economy are a cause for concern. Unless businesses reopen fully, hardships will continue for large sections of society.


We must also be alert to the fact that this hides a dramatic polarization of economic fortunes among Americans that we witness today. The truth is that the lucky ones with jobs have garnered higher savings and consequent increase in wealth while the unemployed continue to face hardships. 


Certainly, data cited above proffers mixed signals and may point to a turbulent recovery at the very best. While the availability of vaccines and systematic inoculation of large sections of society will certainly improve the public health scenario in the months to come, it may not guarantee an early reopening and immediate relief to affected businesses.


An economic recovery in fits and starts may be a reality. A sputtered US recovery can also have a domino effect on the world economy at large. From trade to respective bilateral relations there could be tensions causing many weaker economies to flounder. The pandemic would still have left its indelible impressions, creating fissures via unprecedented income inequalities in a society that has already been scarred and deeply polarized by politics, race and massive economic divide.


That brings the focus to the stimulus 2.0. The stimulus has to be substantive and catalyze the bridging of the economic divide that prevails in the US today. That presupposes Congress will put a united foot forward and keep the nation’s interest first, rather than expedient political gains. Both the Republicans and the Democrats have an incumbent duty to see this happen as soon as possible. Most Americans realize this and know that the country is on the edge. The cost of failure could be a missed opportunity to resuscitate the US economy.


It is for the political leadership to act with agility to bridge the economic chasm and jumpstart the weak economy. For their part, the rest of the world will watch as bystanders hoping that the US rebounds fully and quickly and offers their economies a fighting chance to recover from the devastation of the pandemic.


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