It's official: Americans have run out of pandemic savings
After accumulating over $2 trillion in excess savings during the pandemic, Americans have spent it all away as of the first quarter of 2024.
According to the Fed, Americans spent at least $70 billion a month from their excess savings from Sep 2021 to last fall and over $85 billion per month since last fall.
This past April, excess savings hit negative $169.6 billion, meaning the pandemic cushion has officially been depleted.
“That excess cushion that households were able to fall back on in the immediate aftermath of the pandemic is no longer available for the most part,” Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets, told Bloomberg.
Government economists calculate excess savings by comparing the savings rate during the pandemic to the pre-pandemic average.
During the pandemic, households were able to save a lot more because of stimulus checks and shelter-in-place orders, which simply limited their ability to spend.
Although the loss of pandemic savings might seem scary, economists say it’s all part of the Fed’s plan to cool the economy and put a lid on inflation.
But with so much of GDP tied to domestic consumption, the concern is that a depleted consumer could undercut economic growth and drag the economy into a recession.
Consumer spending slowdown: How much is too much?
Although consumer spending hasn’t fallen off a cliff yet, Americans are “somewhat conflicted” about how to allocate their dollars.
According to analysts at McKinsey, Americans are less optimistic about their finances as well as economic prospects and are already cutting back on certain expenses.
According to McKinsey’s latest survey, “While intent to spend on most essential items grew, consumers planned to pare back their spending on discretionary items, particularly in travel and hospitality-related categories.”
While overall retail sales edged higher in May, sales volume was down year over year. Retail spending also fell by more than 4% in the first quarter, according to the Census Bureau.
“The weakness in the consumer can now be considered a ‘trend’,” wrote economist David Rosenberg. “Early signs of a consumer recession finally coming to the fore.”
Queens’ College president Mohamed El-Erian says the Fed would have nobody to blame but itself if the economy falls into a recession.
El-Erian recently placed the odds of an economic downturn at 35%, saying that the Fed's waiting too long to cut interest rates.
The Fed’s higher-for-longer rate policy will damage “economic growth and financial stability, imposing yet another disproportionately large burden on small businesses and vulnerable households,” he said.