Household Savings Collapse Sparks Recession Fears Among Economists
BY GIULIA CARBONARO ON 7/3/23 AT 11:24 AM EDT
While Americans had built up savings at an unprecedented rate following the pandemic, households are struggling to put money away this yeara trend that has fueled fears among economists of an incoming recession.
During the COVID-19 health emergency, when many across the country were forced into lockdowns and the national economy suffered a shutdown, people's personal savings thrived, with people saving as much as 30 percent of their monthly income and having $2.3 trillion in excess savings between 2020 and 2021, according to the Federal Reserve.
For context, it should be noted that these excess savings were concentrated in the top half of households by income, while many lower-income households struggled to make ends meet.
Three years later, the rate of savings among American households is rapidly falling. In February, the U.S. personal savings rate was estimated to be around 4.6 percentmuch below the decades-long average of about 8.9 percent, according to the Bureau of Economic Analysis. But what does this mean?
Some economists think that the collapse of household savings could lead to a spending slowdown and trigger a recession. Consumer spending currently represents about 70 percent of the U.S. GDP, a crucial factor influencing the country's economic growth.
"Don't see a Recession? It's Last Call at the bar," tweeted housing analyst Amy Nixon, sharing recent data from Wells Fargo showing how personal savings has collapsed in the U.S. "The smart people have already paid the tab and gone home. The remainder will wake up tomorrow with regrets," she added.
"My intuition and common sense says there's not a bottomless pit of savings to support this level of spending, and there's not a bottomless pit of wage growth to keep it elevated enough to drive GDP indefinitely," Liz Young, head of investment strategy at online bank SoFiYoung, wrote in a recent article about the topic. "Time will tell, but I still believe something's gotta give."
Up until now, the recent growth of inflation and the Federal Reserve's attempts to curtail it by raising the bank's key interest rate in 2022 and this year have not curbed household spending by as much as expected. That's because Americans had a lot of savings accumulated during the years of the health emergency they could burn through.
Now, these savings are starting to dry up, as inflation remains relatively high at 4.05 percent in May despite having cooled down compared to its peak of 9.1 percent in June last year. On top of that, wages haven't grown much at all in recent years, staying much behind inflation.
"U.S. consumers are saving their income at a lower rate than they were pre-pandemic," economist Shannon Seery of Wells Fargo told Newsweek. "This is allowing them to spend more in the near-term, but likely comes at the expense of future growth."
By saving less today, Seery said, "households have been able to continue to spend at elevated rates and that sustained level of demand is helping stave off a U.S. recession." But, she added, "acquiring less in savings will ultimately leave U.S. households more vulnerable to economic shock and could potentially position them worse off during an eventual economic contraction."
