After months of to-ing and fro-ing, Congress finally reached bipartisan agreement yesterday on a $900 billion stimulus package — the second-largest relief bill in U.S. history — that will try and resurrect an economy still crippled by the effects of COVID-19.
The deal couldn’t have come much sooner for upwards of 12 million Americans that were set to lose their unemployment benefits on December 26. And although the package is not as generous as the first round of federal assistance given back in March, it will still see most eligible adults receive direct payments of $600 and another $600 per dependent child.
So what does the stimulus package mean?
Most importantly, this stimulus package provides some much-needed financial relief for the millions of Americans that are still out of work due to the pandemic and related lockdowns. However, an injection of cash into consumer hands has some unexpected impacts on the wider U.S. economy.
Take the $2.2 trillion CARES Act that Congress passed back in March, for example. In a survey conducted by the New York Federal Reserve back in October, it was found that more than two-thirds of survey respondents spent their stimulus checks on savings and debt repayment rather than utilities or basic consumption.
In the same survey, the Fed asked how people were planning to spend a second stimulus check if they were to receive one (there was no certainty of another stimulus check being issued at the time). Incredibly, 45% of respondents indicated that they would be saving the money from the check, while spending dropped 4 percentage points to just 24%.
Why does this matter?
For one, it’s encouraging to see that many people feel as though they are in the position to put money aside for a rainy day. However, the fact that close to half of respondents would choose to save the money they receive rather than spend it raises questions over the efficacy of direct payments like this in stimulating the economy, particularly in terms of local spending.
It will also be interesting to see how much of this money is invested back into the market through low-cost or zero-fee brokerages like Robinhood as we saw happen last time, which contributed (at least in part) to the rapid V-shaped recovery the stock market experienced.
However, things have changed drastically for many families in the past few months and, with no end in sight to lockdowns — despite of all the positive vaccine news we’ve seen — we’re sure many people will be more than happy to get some financial assistance in the middle of this long winter.
Head of Content and Publishing at MyWallSt
James is the head of content and publishing at MyWallSt. James’ favorite stock is Teladoc because he believes that they are at the forefront of revolutionizing the healthcare industry.