Revenge Spending or Gradual Decline in Savings Balances?

This week is all about the Federal Reserve of the United States meeting – nothing else matters for traders and investors. However, there is one piece of economic data of particular importance, about to be released in just a few hours from now – the U.S. monthly Retail Sales. 

Before discussing its importance and why traders should care, keep in mind that for the next two weeks, the U.S. economic data is released one hour early due to the changes in the daylight savings time. The market participants expect a decline of -0.5% for the month of February, after the surge seen in January, but the risk is that the data will overshoot the forecast.

Excess Savings Rate Increased Dramatically During the Pandemic

The excess savings rate in the United States is still elevated, despite coming down from its March 2020 peak. In a way, the savings rate followed the course of the stock market. After the dive in the equity prices during the months of March and April last year, the rally that followed showed people’s optimism and confidence that the pandemic will eventually end. As such, as uncertainty levels decreased, so did the excess savings rate.

Yet, it remains at elevated levels, at around $200 billion at the end of last year. Moving forward, the authorities’ job is to convince people to spend it. If we add the recent fiscal stimulus package, the American consumer will have much more money to spend that could lift the economy much faster than initially thought.

Therefore, today’s data is particularly important because it gives investors a clue about the confidence level at the end of the pandemic. Will we see revenge spending now that more and more states are opening up their economies as restrictions are being lifted off?

As mentioned earlier, the risk is that today’s Retail Sales data for the month of February will post a positive surprise. The services search activity picked up from its recent lows, suggesting a comeback. The move should be seen in today’s Retail Sales data as the services sector was one of the hardest hit by the pandemic.

The market, however, may remain unimpressed due to the Fed’s important meeting tomorrow. Nevertheless, consumer spending is a key component of any economy, and the sooner it picks up, the better. If revenge spending will be a theme in 2021, money is not a problem if we judge only by the high savings rate.