America’s pandemic savings are running out

FOR THE past year the success of America’s economy has rested on three pillars: a healthy labour market, falling inflation and robust spending fuelled by savings accumulated during the pandemic. This last pillar may be starting to give way. Research by Hamza Abdelrahman and Luiz Oliveira of the Federal Reserve Bank of San Francisco suggests that Americans have burned through more than 90% of the “excess savings” they amassed in 2020 and 2021. What little remains, the economists estimate, is likely to be gone by the end of September.

During the pandemic stimulus cheques and other government support boosted personal incomes by more than $1trn, while lockdown restrictions reduced Americans’ spending by another $1trn. As a result, monthly personal savings swelled from around 9% of income in 2019 to more than 30% in the spring of 2020, and 20% during the Alpha and Delta waves of the pandemic the next year. All told, Americans accumulated excess savings—the amount above what would be expected from pre-pandemic trends—of around $2.1trn.

But data from the Bureau of Economic Analysis, a government agency, show that by June 2022 America’s personal-savings rate had plummeted to just 2.7%. Although the rate has ticked up slightly since then—in June households squirrelled away 4.3% of their incomes—it remains well below pre-pandemic levels. There are signs that a growing number of households are financially stretched. Data from the Federal Reserve Bank of New York show that credit-card debt now stands at more than $1trn, or around 4% of annual income—up 16% from a year ago. Late payments on credit-card and auto-loan debt are also rising (albeit from a low base).

But when Americans’ pandemic savings will run out is a subject of debate. Although the forecast by Messrs Abdelrahman and Oliveira shows that excess savings could be depleted by the end of next month, economists at the Federal Reserve Board estimate that they were already exhausted in the first quarter of this year. By contrast, analysts at Goldman Sachs, a bank, reckon that there is little reason to think that households will ever get through their excess savings completely . The discrepancy can be explained by differing methodologies and assumptions about the pre-pandemic trend.

What is not in question is that Americans have spent down their cash reserves. Messrs Abdelrahman and Oliveira find that this has happened faster than after previous recessions, and the drawdown has taken place across all income groups (see chart). At the same time, the stockpile of excess savings may matter less than it used to. For the first time in a few years nominal wage increases for most Americans have started eclipsing the rate of inflation. That means that, at last, they are enjoying real income growth, giving them greater latitude to fund their spending from earnings rather than savings. The question is whether that will be enough to sustain America’s consumer-led recovery.■