Americans’ pandemic savings are gone – and the economy is bracing for impact – BNN Bloomberg

The cushion of pandemic savings that helped Americans weather high prices in recent years has been depleted, contributing to the loss of consumer firepower that is flooding the US economy.

Delinquencies are increasing. Executives are showing caution among buyers in recent earnings calls, and retail sales barely rose in May after falling a month earlier. Economists forecast firm inflation-adjusted consumer spending in Friday’s data, helped by lower gasoline prices, but that would follow an outright decline in April.

The resilience of US consumers – and their willingness to spend despite rising prices and high borrowing costs – has been a pillar of the US economy’s unwavering strength in recent years. A healthy labor market has played a key role, but so has the roughly $2 trillion in excess savings that Americans accumulated during the Covid-19 pandemic.

Those excess savings have been completely depleted since March, according to the Federal Reserve Bank of San Francisco, raising concerns about the sustainability of consumer spending.

“That extra cushion that families were able to fall back on immediately after the pandemic is no longer available for the most part,” said Stephen Stanley, chief U.S. economist at Santander US Capital Markets LLC. “And so their wealth is intrinsically tied to their actual income, which is inevitably a function of the labor market.”

Employers added 272,000 jobs in May, beating all economist forecasts, and layoffs are low. But the pace of employment has cooled and the unemployment rate has begun to rise.

For now, that resilient labor market is keeping consumers on their toes and giving the Fed room to keep interest rates high to tame inflation, and economists say household balance sheets are generally healthy. But policymakers, including Fed Governor Lisa Cook earlier this week, acknowledge the growing financial strain in some pockets of the economy.

“Consumer pullback is all part of the Fed’s plan,” said Dana Peterson, chief economist at the Conference Board. “But it’s hard to calibrate that and there are concerns that maybe consumer spending shrinks too much.”

US household debt has hit a record and more Americans are falling behind on their credit card payments, according to data from the New York Fed. A third of households in a recent US Census Bureau survey reported that it was somewhat or very difficult to pay for common household expenses a week ago, and the savings rate has fallen.

Some retailers are also warning of changes in consumer behaviour. Target Corp.’s chief growth officer. Christina Hennington said consumer debt levels are among the reasons the company has a cautious near-term growth outlook. Meanwhile, Walmart Inc. chief financial officer John David Rainey flagged shoppers are spending more of their paychecks on necessities and less on general merchandise.

Savings depleted by the pandemic

Joseph Lewis, of Brockton, Massachusetts, has accumulated about $15,000 in new savings until the end of 2021 due to the effects of the pandemic. Not only was he able to save on gas and parking, but he also took advantage of the government’s pause on student loan payments.

That money helped with repairs to the home Lewis, 33, bought with his girlfriend in 2022 and financially boosted day-to-day expenses like groceries. But now, with those savings largely spent, he finds himself scrambling wherever he can and looking for ways to save money — including chasing after his 6-year-old twins at home, reminding them that turn off the lights behind them.

“We’re in a space where we have to be financially creative to figure out what you can do without and even what you can do on your own,” said Lewis, who works. as associate director of an academic program for high school students.

It doesn’t help that borrowing money isn’t likely to get any cheaper anytime soon. Fed officials have signaled they plan to keep interest rates at current levels, a more than two-decade high, until they gain more confidence that inflation will continue to cool.

“Consumers can continue to spend, but it’s hurting,” said Tim Quinlan, a senior economist at Wells Fargo & Co. Americans’ non-mortgage interest payments — both on credit cards and car loans — as a share of their disposable income was 2.4 percent in April, near the highest levels since 2008, according to Quinlan analysis . data of the Department of Commerce.

“The cost of carrying that debt is taking a bite out of people’s incomes in a way that hasn’t happened since the financial crisis,” Quinlan said. He expects consumer spending growth to slow in the second half of 2024.

Still, as San Francisco Fed researchers acknowledge in their research, estimates of how much pandemic-era savings remain in Americans’ pockets — and the potential impact on spending — carry uncertainty because economists use different calculation methods.

In fact, some Americans have seen their wealth increase significantly thanks to rising home values ​​in recent years and record high stock prices. Continued spending by these individuals can bolster consumer spending in the aggregate, even if others are forced to pull back on spending.

“We almost doubled our pension from before the pandemic,” said Geoff Olson, a 64-year-old robotics engineer who lives in California’s Bay Area. “That was a combination of us investing more money and we did very well in the stock market.”