The U.S. economy, at the time of this writing, is amidst perfect uncertainty. No one knows, where are we headed? The life is full of contradictory signs and signals? The shelter- in- place, lockdowns, social distancing, administrative directives to use masks in the public, and the assembly of thousands for racial protests or election rallies are co- existing.
The number of tested positive or dying due to corona virus are on the rise. Hospitals’ bulletins are saying no more vacant beds. People are losing jobs in millions. The economic recession and financial crisis are squarely at the door. Emergency economic measures have been announced both by Monetary Authority and the Fiscal Authorities of the country. Federal Reserve, the monetary authority, has announced easy monetary policy by lowering federal funds rate to near zero. In addition, emergency measures, like never before, buying ETFs and buying corporate bonds have been announced. The Congress and Administration have announced emergency economic relief and stimulus package to provide cash support to low-income families and loans and grants to small business. ‘Mortgage Loan Moratorium’ and ‘Eviction Moratorium’ have been announced by the concerned authorities. The ‘second wave’ is scaring the hell out of everyone. The stock market numbers don’t show up in sync with the sentiments and mood in the main street.
It is not normal, is to state the obvious. The problem is compounded by whom to trust? Whose information is correct and whose’ not? When will this COVID-19 be over? What will happen to markets, asset prices and small businesses? The memories of 2007-09 crisis when stock market had suffered a decline in the vicinity of 50% over 18 months and real estate 35% over 3 years are still haunting.
It had been on record in 2019 that “When broken down by generation, Generation X’s sleep was most affected by financial woes with 64% reported losing sleep over money, while 58% of Millennials and 54% of Baby Boomers were affected by money worries.” “70% American say they are struggling financially.”
What would be the current state of personal and family finances in USA should not be difficult to imagine. Some headline statistics may however sound otherwise.
As of May 29, 2020, the U.S. Bureau of Economic Analysis reported that Personal income increased $1.97 trillion (10.5 percent) in April. Disposable personal income (DPI) increased $2.13 trillion (12.9 percent). Real DPI increased 13.4 percent in April.
The personal savings rate hit a historic 33% in April. This rate — how much people save as a percentage of their disposable income — is by far the highest since the department started tracking in the 1960s. April’s mark is up from 12.7% in March.
Total nonfarm payroll employment rose by 2.5 million in May, and the unemployment rate declined to 13.3 percent, reported the U.S. Bureau of Labor Statistics. (Incidentally, 13.3 percent unemployment rate stands quite shoulder to shoulder with what we had in great recession during 2007- 09)
Advance estimates of U.S. retail and food services sales for May 2020, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $485.5 billion, an increase of 17.7 percent (± 0.5 percent) from the previous month.
Could it be that social security and emergency cash support is shoring up personal income? Could it be that spending cuts are shoring up savings? Could it be that people are covering themselves for the ‘second wave’ of COVID-19? The economic history will answer these questions with clarity, in due course of time. But one message is clear: Crisis or No Crisis- Every family needs an emergency fund.
This crisis is neither the first nor the last. Therefore, for now and for the future, it is helpful to refresh the basic lessons of personal and family finance:
- Every family needs an emergency fund to cover 3- 6 months’ average monthly expenses. Preparedness is the best strategy. You may know that short story, ‘I can sleep, when the wind blows’. The moral of the story has been preparedness is the best strategy. Cutting out discretionary expenses and building savings are the key to building an emergency fund. Those who had savings will be ‘able to sleep, when the wind blows’. For others, it is a terrible storm, to say the least.
- Those who have savings over and above emergency fund, they may pick up assets available for cents on dollars. A crisis can be a wealth-building time if you had investible funds.
- The Return of Investment is more important than the Return on Investment.
- The health insurance, disability income insurance and life insurance provided by employers may not be available exactly when you need most in such times of job losses. The insurance gap is important to know and plug-in time.
Dr. Sat Parashar, PhD, is a Financial Services Professional with MassMutual. He may be reached at email@example.com