With the reopening of the U.S. economy underway, it’s important for everyday Americans to feel comfortable returning to their jobs and beginning to spend again. Not only did the nationwide shutdown result in many layoffs, furloughs and new work-from-home programs, but consumer reigned in their spending significantly.
Going forward, there are a few factors that will help consumers to feel more confident in order to jump-start the economy.
What Is the Wealth Effect?
These factors are based on the so-called “wealth effect.” In short, consumers are more willing to spend on purchases big and small if they feel financially secure. There are three broad ways that consumers might feel more secure in the coming months as the economy recovers from the global pandemic.
1. Employment and job security
First, if Americans are able to return to work, find new jobs, or feel more confident in their existing jobs, then they may feel better about their financial situations. While it is still early, there are signs that the job market is beginning to thaw. The monthly jobs report for May surprised many economists with the number of new jobs created as cities began to reopen, and the weekly unemployment claims data have been improving. A major part of this improvement is due to workers who have been recalled to their jobs.
2. Investment portfolio and market health
Second, a large part of Americans’ wealth is in their investment portfolios. With the stock market having rebounded since the crisis began, many consumers may feel more confident with their finances. At the moment, the S&P 500 index of large U.S. companies is only about 3% below where it began the year. Since the bottom in March, the S&P 500 has risen about 40%.
Chart: The U.S. stock market has recovered significantly since its low in March as the nation was beginning to shut down. The S&P 500, shown below, is just shy of where it started for the year.
3. Housing prices
Third, perhaps the largest asset that the average American owns is their home. While the data we have are backward-looking and appear with a lag; housing prices were still rising through March even as concerns over the novel coronavirus sparked a nationwide shutdown. In fact, housing prices on both a nationwide and 20-city basis reached historic levels despite other economic data plummeting during that period.
More recent data from April show that building permits and housing starts both declined, but not as much as other economic activity. These data measure the amount of activity within the housing sector, including actual and anticipated home building. Especially in the case of new home building, this activity was likely disrupted not by choice but by the nationwide lockdown. Similarly, building permit applications would have been disrupted as government and private offices closed.
Outlook for Economic and Financial Recovery
Overall, the fact that the job market is beginning to stabilize, the stock market has rebounded, and housing prices remain high should help the average consumer to feel more comfortable with their financial situation. Of course, this is only an average – many Americans continue to face difficulties in this economy. The hope is that as businesses reopen, all Americans can begin to restore their incomes and savings.
