Households are facing a shrinking reserve of savings and a growing mountain of high-interest consumer debt.
While inflation may be in retreat, the increases in the cost of living over the past two years have eaten away more than half the stockpile of savings that households amassed during the pandemic at the same time credit card debt has soared to record levels, according to the latest government data. The total amount of revolving debt (mainly credit card debt) held by Americans in February surpassed the total amount of extra savings households built up during the pandemic.
Cheaper gas—and grocery prices falling slightly on a monthly basis for the first time since November 2020—gave shoppers a welcome break in March, and helped drive year-over-year inflation down to 5% from 6% in February, data from the Bureau of Labor Statistics showed on Wednesday. But price increases have already done their damage.
That’s according to an estimate of “excess savings”—the amount households have saved beyond their usual level—and data on consumer credit from the Federal Reserve. John O'Trakoun, an economist at the Federal Reserve Bank of Richmond, calculated the amount of excess savings using data on consumer income and spending from the Bureau of Economic Analysis, and provided it to Investopedia.
Many economists believe the dwindling savings combined with the still-rising prices for the things we buy will force people to cut back on spending, slowing the economy and helping bring about a recession.
“The combination of declining savings and increasing debt will leave consumers with less money to spend, which will likely dampen retail spending,” Xander Snyder, a commercial real estate economist for First American, a title insurance company, wrote in a commentary this week.
The pandemic’s brief downturn caused a surge in personal savings in 2020, according to data from the BEA. In April of that year, the government boosted unemployment insurance and sent out $1,200 stimulus checks to help Americans weather the wave of more than 20 million layoffs that came along with the pandemic’s arrival. At the same time, business closures cut off opportunities to spend money. Households saved 33 cents out of every dollar of income that month, the highest in records that go back to 1959.
The heightened savings continued for more than a year as the pandemic, and the government’s extraordinary emergency support for families, continued. The trend began to reverse in September 2021. Household finances have faced pressure from all sides: rapid price increases for necessities from eggs to houses; the end of pandemic relief programs from the government; and higher borrowing costs on consumer loans from the Federal Reserve’s campaign of anti-inflation rate hikes-all of which have made it harder to save.
By February, the excess savings stockpile had dwindled to $1.2 trillion, less than half its $2.6 trillion peak in 2021 according to O’Trakoun’s data. As of February 2023, households were saving only 4.6% of their income on average, less than half the 9.3% pre-pandemic savings rate of February 2020 BEA data show.
The shrinking savings won’t necessarily force people to cut back on shopping. Historically, changes in the personal savings rate haven’t always predicted how much people spend, O’Trakoun said in a recent analysis. Instead, spending tends to more closely track household wealth, which is more affected by the prices of homes and other financial assets than by savings. Consumers’ appetite for spending could prove to be better—or worse—than the savings data alone would suggest, he said.
Still, the reduced savings indicate increasing financial pressure for households, especially less well-off ones. Lower-income households have already mostly exhausted their pandemic savings, Lisa Cook, a Federal Reserve governor, said in a speech at the end of March. And sooner or later, the overall savings cushion is likely to disappear.
“The overhang, the savings that consumers have accumulated, has a few more months to run, but it doesn’t have another year to run,” economist and former Treasury Secretary Larry Summers told CNN in an interview last month.