One of the sillier ideas in economics is that of a “representative agent” household – the idea that consumer spending can be described as if it were the result of the decisions of a single person. This notion isn’t confined to academia – businessmen also talk of “the consumer” – but it stops us understanding what’s going on now, because in fact it is differences among households that are crucial.
This is especially true of saving behaviour. If next week’s numbers from the Bank of England are anything like last month’s, they’ll show that households have increased their cash savings and paid down some credit card debt. But this doesn’t mean we are all doing this. Such aggregate behaviour hides huge differences.
Some of us are forced savers. We’ve kept our job and salary, but we’ve been unable to spend as much as we usually would simply because so many shops have been shut. By default, therefore, our bank balances have increased and our credit card debt has fallen.
But many others have not been so lucky. Last week’s official figures showed that total hours worked in the economy fell by 8.7 per cent in the three months ending in April compared with the previous three; that 4m more people are working fewer hours than they’d like for economic reasons; that average wages fell 1.7 per cent in April alone (an average that disguises bigger pay cuts for many); and that there were 467,000 fewer people in work at the end of April than there were just before the lockdown.
Hundreds of thousands of us, then, have suffered a drop in income – and for some, a calamitous drop. It’s natural for these to respond by running down savings or increasing borrowing. And as the Resolution Foundation points out, these people have been disproportionately the low paid.
Bank of England data only tell us that the forced savers outweigh the forced borrowers – so far.
But this could well change. The long queues outside some shops last week tell us that at least some pent-up demand will be released as the lockdown lifts. Those of us who have been forced savers will therefore run down our savings at least a little. As this will probably coincide with other people borrowing to tide themselves over unemployment or short-time working, aggregate borrowing might well increase again soon.
In the short term this could give a huge boost to aggregate corporate profitability. A rise in consumer spending against the backdrop of low employment costs is great for overall profits – especially because it will be accompanied by still-high government borrowing. This, I suspect, is one justification for equities’ rally since March.
Such a burst, though, will not be sustainable. Eventually, those who are now suffering joblessness and lower hours will have to pay down the debt they are accumulating. As they do so, consumer spending will lag behind wage growth, to the detriment of aggregate profits. This will be especially nasty if consumers’ retrenchment is accompanied by fiscal austerity.
In this sense, aggregate data is doubly misleading. Not only does the rise in aggregate savings now hide the fact that many of us are borrowing, but also a surge in aggregate profitability will distract us from the fact that such growth might not be sustainable. Now – even more than normally – we must be very sceptical about macroeconomic numbers.
