Inflation Cutting into Americans' Pandemic Savings

New York, NY, November 21, 2022-"It is the $1.7 trillion question for the U.S. economy: How long can the savings consumers built up during the pandemic keep their spending going?,” reports the Wall Street Journal.

“The answer: about nine to 12 more months.

“Consumers built up unprecedented savings buffers during the Covid-19 pandemic, thanks to government stimulus and fewer opportunities to spend. The extra cash helped households pay down debt, buy goods like new appliances and furniture during lockdowns and take vacations once restrictions lifted. It gave businesses leeway to raise prices and hire more workers to meet stronger demand.

“Economists estimate that headed into the third quarter of this year, households still had about $1.2 trillion to $1.8 trillion in ‘excess savings’-the amount above what they would have saved had there been no pandemic.

“That buffer, combined with a strong labor market and rising wages, has helped consumers continue spending in recent months, even with inflation and mortgage rates at multidecade highs. U.S. retail sales posted their strongest gain in eight months in October.

“Nonetheless, there are also signs they are working their way through that buffer, and an end is in sight.

“This can be seen in how much consumers are saving and borrowing monthly.

“In 2019, before the pandemic hit, households saved 8.8% of their disposable income. That saving rate jumped to 16.8% in 2020, the highest annual saving rate on record, as government stimulus and unemployment benefits left many consumers flush with cash but with few opportunities to spend during lockdowns.

“In 2021 the saving rate moderated to 11.8%, and it has fallen further during 2022. The rate has been below 4% for seven straight months and in September it stood at 3.1%, near its lowest level since the 2008 financial crisis.

“This suggests that consumers are spending more and saving less of their monthly income than normal, because inflation forces them to spend more on higher-priced goods and services.

“Consumers had also used their hefty savings to pay down credit-card debt. There are signs that has changed too. The Federal Reserve Bank of New York said credit-card balances increased 15% year-over-year in the third quarter, the largest increase in over two decades. The rate of delinquency, that is debt more than 30 days past due, rose across income groups.

“These changes should steadily chip away at households’ mountain of savings.

“Reduced saving rates can be a sign of financial stress, said Ian Shepherdson, chief economist of Pantheon Macroeconomics. But he said that is not the case in aggregate now given consumers are running down a pile of cash.

“Economists’ estimates for how much consumers have left vary. Mr. Shepherdson puts it at $1.3 trillion and estimates that at the current rate of rundown, that could last another year or so. JPMorgan Chase & Co. put the hoard at about $1.2 to $1.8 trillion in the third quarter and said it could be entirely spent by the second half of next year.”