Since the first round of stimulus checks and additional unemployment measures last year, academic researchers have had some time to assess the impact. Researchers from the Federal Reserve and the University of Houston have assessed the different studies to find the key themes.
At a high level, last year the CARES Act appears to have boosted spending by around 2% to 5% and there are other important effects under the surface.
How Stimulus Checks Are Used
How stimulus checks are spent depends on several factors. If someone fears they are out of work for some time, then they tend to spend less of their check. However, if they view their unemployment as temporary, then more of the check will be spent sooner. If they are working and in a higher income group, more of the check will typically be saved.
Secondly, the fact that past rounds of checks came during more severe lockdown and social distancing measures also impeded spending. There was simply less things for stimulus checks to go on, with a lot of businesses closed and movement restricted.
The Split Between Spending And Saving
In aggregate, from past checks across all recipients about a third of the check amount was spent, a third went to debt paydown and a third was saved. However, there were differences between groups. Often the unemployed and poorer groups, would spend or repay debt with virtually all of their stimulus checks out of necessity, whereas higher income groups would save the money. Having children matters too, because those households are often more financially constrained, so more likely to spend their check.
The American Rescue Plan
While the latest round of stimulus from the American Rescue Plan is not yet law, slightly tighter income targeting and more generous treatment of children may lead to a greater proportion of this round of checks being spent, and hence boosting the economy in the short-term. In addition to stimulus checks there is also other spending that will help lower income groups such as through Low Income Home Energy Assistance Program.
Greater Spending Impact
It seems likely that this round of stimulus could have a more immediate impact on the U.S. consumer. This is because more targeted as lower income groups. However, the economic environment is different too. Now, more businesses are open and accessible, making them better able to benefit from higher spending. Furthermore, overall economic uncertainty, may now be slightly lower too, making recipients feel more comfortable spending than saving as a precaution.
Return To Work Incentives
Studies have generally shown that larger unemployment benefits don’t impact recipient’s desire to return to work.
There was some suspicion this could be the case as in many cases unemployment benefits exceeded the paychecks that would have been earned from working. However, studies have not found this. States where unemployment benefits were more generous did not see greater reluctance to return to work.
It is believed this is, in part, due to the fact that the unemployment benefits were short-term and too small to make it worthwhile for an unemployment recipient to refuse a job offer. This time around may be similar as the latest stimulus proposal increases unemployment benefits until September.
The markets have already rallied to some degree on expectations of further stimulus spending and tracked the measure’s progress over time, so President Biden signing the bill into law should not be a major surprise to the stock market.
However, as before, the stimulus measure does look set to boost the U.S. economy for much of 2021 and help various consumer-facing businesses. This time against a potentially slightly more favorable backdrop.
However, now time for the markets there are also concerns about inflation. Potentially additional spending also leads to rising prices. This is a topic the bond markets in particular are wrestling with as 2021 has seen a bleak start for government bonds.
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