NEW YORK – As policymakers debate the effectiveness of the CARES Act during the COVID-19 pandemic, new research shows that consumer spending behavior in regard to using the government-issued stimulus checks vary depending on household liquidity, and is concentrated thus far primarily on non-durable goods. According to a new study of households expenditures, Columbia Business School Professors R.A. Farrokhnia and Michaela Pagel find that individuals that received stimulus checks spent an average of a third of the checks at a rapid pace on household needs like food and rent, and then kept the rest in their accounts – a different kind of behavior from previous government stimulus distribution efforts.
The new study is the first to analyze the spending of U.S. households that received stimulus checks through the CARES Act. Researchers were able to view near real-time, high-frequency consumer financial transactions – a new capability for economists and researchers – through SaverLife.org, a national non-profit fintech that helps individuals develop and sustain savings habits. The organization anonymized and shared spending information of over 5,000 households with the researchers, who have been closely tracking such transactions in the days following receipt of the stimulus checks.
Researchers found: 28 percent received stimulus checks by April 21, 2020, Among individuals receiving a check, daily spending increased from an average of under $100 per day, to approximately $150 on the day the check was deposited, to over $200 in the following two days, in general, $0.25-$0.35 for every dollar of stimulus received had been spent at the time of the research, in contrast to stimulus efforts in 2001 and 2008, CARES Act checks are being used to catch up on rent and bill payments and to buy food and non-durable goods.
"The COVID-19 pandemic has refocused household priorities, and the CARES Act stimulus checks are crucial to people in need," said Professor Michaela Pagel, the Roderick H. Cushman Associate Professor of Business. "As shelter-in-place orders lead to job losses and reduced household income, consumers are making the most of their stimulus checks to quickly purchase essentials and pay overdue rent, mortgages, and other bills."
"Given precedence and the amount of the checks, one might have expected larger spending on the likes of automobiles, electronics or appliances that eventually would have a bigger impact on economic recovery. But based on transaction data in our analysis, it’s clear that these checks are sorely needed to help households stay afloat in these very challenging times," said Professor R.A. Farrokhnia, Executive Director at the Dean’s Office of Advanced Projects and Applied Research in Fintech. "This is in part because it was quite difficult anticipating the depth of COVID-19’s economic damage, especially given the fast pace of the fallout. With so much uncertainty on how long this crisis will last, lower-income households are prioritizing spending down their stimulus payments on buying essentials that can help them right now, as opposed to spending on durable goods, for a number of reasons. And those with higher household liquidity are mostly just keeping the money in the bank, not spending on much thus far."
Farrokhnia, Pagel, and their co-authors Northwestern University Professor Scott Baker, University of Southern Denmark Professor Steffen Meyer, and University of Chicago Professor Constantine Yannelis found that spending on food, household, non-durables, and payments each increased by approximately $50-$75 in the three days following receipt of the check. In the sample set of over 5,000 households from SaverLife.org, the average user was 38-years-old, living in a household of 3.3 people. On average, users earned an income of $25,000 per year and had a median bank account balance of $141.02.
These account balances and available household liquidity, the team found, helped determine whether individuals spent down their checks quickly or saved portions of their checks for future spending. The portions of stimulus that have been added to households savings and how it will be spent, if at all, will have important implications and multiplier effects in jumpstarting the economy. Those two previous stimulus efforts, the authors note, preceded significant spending on auto expenses, electronics, and appliances.
"For policymakers, it’s now possible to analyze how the current stimulus program will directly impact spending for households in different socioeconomic circumstances," said Pagel. "Under these current conditions, such analysis is crucial to determine if the stimulus efforts are as effective as in previous downturns. We argue that spending the stimulus checks on essentials and leftover bills may have less of a stimulating effect on aggregate consumption."
The study Income, Liquidity, and the Consumption Response to the 2020 Economic Stimulus Payments can be found online.
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