- Economic activity is still below pre-pandemic levels. It is likely to stay that way for some time. However, global manufacturing activity is above pre-pandemic levels. There are reports of component shortages and the high cost of shipping freight. Could pent-up demand overwhelm supply?
- Government budget deficits have risen a lot. Much of this is transfer payments—unemployment or furlough payments which transfer into household savings. You cannot add household savings to government deficits and tell a story of pent-up demand—that is double counting. Government demand (e.g. infrastructure spending) may be a story for later this year, but government demand is spread out over time.
- Consumer savings rates are 5% to 6% above normal in the US and Europe. That represents potential spending power. US citizens have fewer economic restrictions than Europeans—so US pent-up demand can be realized now. European pent-up demand is likely to be spent later in the year, when restrictions end. In fact, European demand may pick up as US demand slows.
- The pent-up demand story is currently about manufactured goods. The more important service sector of the economy still has weak (or zero) demand. This is why overall economic activity is likely to remain below pre-pandemic levels for most of this year.