US household savings surge to new highs as consumers become more cautious

This is a summary of an article by Gavyn Davies that appeared in the FT on 23 May 2020. The full article can be found here:

https://www.ft.com/content/fffa1302-99ba-11ea-adb1-529f96d8a00b


Several aspects of the recession that has started in the US and other major economies are simply a much larger version of a “normal” recession, but there is one major difference from the past. Because fiscal policy has reacted so rapidly to the collapse in output, household disposable income has been shielded almost entirely from the weakening in the labour market, and the enormous drop in the consumption of discretionary goods and services has been accompanied by a jump in the savings ratio.

In the US, for example, household savings may exceed 20% of disposable income in 2020 Q2, about three times the level seen before the virus lockdowns began.

Although savings will certainly diminish as the lockdowns on household behaviour are eased, there may be a residual of precautionary savings which remain stubbornly high.

A complete withdrawal of the fiscal stimulus before consumer risk appetite has returned to normal will slow the recovery and keep unemployment above the natural rate for several more quarters. As Federal Reserve Chairman Jay Powell has argued, more fiscal support may be needed to promote a full recovery in the economy.

Update: April data show even larger surge than expected 

Why the US unemployment surge is so much worse than in Europe

This is a summary of an article by Gavyn Davies that appeared in the FT on 19 May 2020. The full article can be found here: https://www.ft.com/content/0a4f4bb0-94f7-11ea-af4b-499244625ac4 The flexibility of the US labour market is often viewed as one of the main reasons for the long term success of the American economy, compared to that of Europe, both in terms of asset market returns and growth in potential GDP. However, the policy responses to the labour market shocks caused by the supply lockdowns to control Covid-19 may change these perceptions.

Negative interest rates and government bond curves

In the past few weeks, nominal interest rates at the very front end of the US yield curve have shifted marginally into negative territory for the first time. Although negative policy rates have become commonplace in both Japan and Eurozone since the mid 2010s, and have extended to longer dated bonds, this phenomenon is still seen as a complete novelty in US markets.

With breakeven inflation rates generally remaining well anchored on the Fed's 2 per cent inflation target, and the FOMC unanimously having determined only last October that negative policy rates were still undesirable, investors had not, until lately, seen any reason why the US central bank would follow the ECB and the BoJ into negative territory. But the COVID-19 economic crisis may be changing that.

Bank of England's V-shaped scenario differs from the Fed's view

The Bank of England's Monetary Policy Report for May shows an economic "scenario" that depicts the "worst UK recession for 300 years". This sounds extremely alarming, and indeed it is. But in fact the MPC has probably chosen the least-bad path for output that is feasible in present circumstances. As many independent economists have warned, a completely unbiased central projection would have been considerably worse, especially after the trough of the recession is reached.

New blog on global macro starts today

Welcome to a new blog on global macro-economics, focused on the interaction between the world economy, policy and markets. The content will mainly be written by Gavyn Davies, Chairman of Fulcrum Asset Management, drawing frequently on the work of the Fulcrum economics research team.

After lockdowns, economic sunlight or a long hard slog?

Equities imply that economic activity will swiftly return to previous peaks

The strong recovery in global financial confidence caused the S&P 500 index to rebound 13 per cent in April, leaving US share prices only 9 per cent below their levels at the end of last year. This may seem puzzling, given the slim prospect that a vaccine against the virus, or effective treatments, will become available soon.

The surge appears to rest on the pattern shown in gross domestic product forecasts from the big investment banks (see below), which is mainly driven by the expected path for supply shutdowns.