Part and parcel of most constructive takes on the US economy in 2022 is the notion that “excess” savings (“buffers,” as it were) accumulated during the pandemic will be sufficient to buoy spending despite surging prices for gas, groceries and necessities.
I’m dubious, but I prefer to express my skepticism more eloquently than other misanthropes, some of whom employ clichés and social media vitriol to inundate the public with divisive propaganda masquerading as macroeconomic commentary.
To be sure, there is a lot of cash out there. The simple figure (below) shows deposits and money market fund assets, both of which remain elevated versus pre-pandemic levels.
That’s real money. And it belongs to real people, who can spend it or buy stocks with it or bury it in the backyard.
One obvious problem is that most “extra” cash belongs, by definition, to people who don’t need it. If they needed it, it wouldn’t be “extra.” People for whom cash can be “extra” comprise a very small percentage of the populace.
Everyone else doesn’t have “extra” cash, they have more or less savings, which in turn is a function of disposable income, where “disposable” doesn’t mean totally superfluous. People who have lots of disposable income aren’t using it as kindling for backyard bonfires. When it comes to disposable income, people fall somewhere on a continuum where one end is labeled “Insufficient for basic necessities” and the other “Enough to afford anything that regular people might want to buy.”
If you’re fortunate enough to sit somewhere near the “rich” end of that continuum, you’re not actually rich. You don’t have “extra” cash just because you can afford the monthly payments on a $75,000 car. “Extra” cash is when you buy that car outright, on a whim.
This discussion matters right now, because when inflation is very high, everyone on the continuum moves along it in the wrong direction, even if, for the most fortunate, the slide is barely perceptible. This dynamic is felt most acutely at the lower-end of the middle class. Those are the “trade-down” customers Dollar General and Dollar Tree discussed Thursday on their respective conference calls.
Do note: By “most acutely” I don’t mean to trivialize the plight of those for whom inflation is an economic death knell. Rather, I mean that for a subsection of the populace, current inflation realities mean they no longer reside in the same economic tier they occupied just a year ago. They’ve moved down the social pyramid, and not without noticing.
Those consumers are experiencing a discernible downgrade to their lifestyles. Specifically, they’re shopping at dollar stores for the first time. As Dollar General CEO Todd Vasos put it, “shopping patterns are definitely changing and we’re seeing it happen right before our eyes.”
These changes may, or may not, impact aggregate spending. A dollar spent at Dollar General is just like a dollar spent at Walmart which is just like a dollar spent at Best Buy, and so on. But where it’ll show up first is in the savings rate, because if “extra” dollars aren’t really “extra” for 90% of Americans, what are they? Well, they’re saved dollars. Sure enough, the personal savings rate fell in April to the lowest since 2008 (figure below), data out Friday showed.
At 4.4%, the rate is now around half of the long-term average, although I’m not sure that’s terribly relevant given that Americans became a society of reckless spendthrifts starting in the 90s.
Bloomberg offered the generous interpretation. “Americans are saving at the lowest rate since the onset of the global financial crisis, underscoring consumers’ willingness to spend even in the face of decades-high inflation,” Molly Smith wrote Friday.
“Willingness” probably isn’t the right word. ING’s James Knightley said basically the same thing, only his cadence was more cautious, even as he cited solid spending for a generally upbeat take on Q2 growth. “For now, it seems that households are prepared to run down some of their savings accumulated through the pandemic to finance spending and maintain lifestyles,” he wrote.
Being “willing” to do something and being “prepared” to do it aren’t always the same thing. “Willingly” can be synonymous with “happily” or, more often, “readily.” “Prepared” conjures “begrudgingly.”
Nobody happily runs through their savings (or reduces the amount they save) to finance gas, food and electricity. Those aren’t happy expenditures. You might be prepared to do it, though, just like you might be prepared to shop at Dollar General if it means saving on gas by “staying closer to home,” as Vasos put it Thursday.
For markets, the drop in the savings rate is arguably good news to the extent it suggests inflation won’t derail the economy in the near-term. I suppose you could argue the US has proven, over decades, that the country can “thrive” as a nation of heavily indebted, cash-poor profligates, but eventually, economic precarity erodes people’s physical and psychological well-being.
On Friday, the final read on University of Michigan sentiment for May showed consumers’ mood worsened in the back half of the month. “[The] drop was largely driven by continued negative views on current buying conditions for houses and durables, as well as consumers’ future outlook for the economy, primarily due to concerns over inflation,” the color accompanying the survey said.
Pessimism about the medium-term was less pronounced, and consumers generally expect to be better off within five years, suggesting the “dream” is still alive, so to speak.
But as things sit now, sentiment is stuck at a decade nadir. New survey director Joanne Hsu noted that “while the declines in sentiment were visible across demographic groups, middle-income consumers and middle-educated consumers showed the strongest declines from April.” That’s the “trade-down” cohort.
Spot on assessment in many ways. Though I would suggest a slight wrinkle to the argument in regards to disposable income and elevated savings. I think we have a longer runway which makes both the recession hawks and the no recession crowd correct. No recession now, but yes recession next year. And there is no way out, a recession will happen either 2023 or early 2024, it is merely a question of how bad and for how long.
“One obvious problem is that most “extra” cash belongs, by definition, to people who don’t need it. If they needed it, it wouldn’t be “extra.” People for whom cash can be “extra” comprise a very small percentage of the populace.”
I think this slice of the population is actually quite large at the moment, say, 50th to 85th percentile of income earners or 35% of American consumers. Talking to a few real estate agents in my area, Boston metro, people are willing to spend 25% over what it cost last year (already ridiculously high) to rent an apartment. And per the agents, these are mostly young professionals. So they don’t make enough to afford the rent, but they have the savings to pay for it, so they justify it as a necessity. They adjust down spending on some “stuff”, but not everything because as H says (I’m paraphrasing) they still need to live their lifestyle brand (everyone’s a brand these days, or at least they need to feel like it).
If we think about elevated savings in the bank as a line-of-credit that one gives to oneself, as most of these people appear to be doing, we can see this excess lifestyle spending (mostly on “necessities”, which now cost more because of inflation) has a limited life span. Income allows one to spend at a certain level into perpetuity (theoretically), but financed spending has a limit and will eventually end. The end of consumer spending usually is presaged by exploding credit card balances. We’re not there yet, but the self funded lines of credit need to be “maxed-out” first.
I see the end of the party coming some time next year. Real estate will likely crash a new possibly with a larger and longer dip than the GFC. Global real estate is teetering on a cliff and has much more systemic risk than anyone (important public facing economic/finance people) is currently talking about.
This is a good comment. My initial reply was inadequate, so I removed it. I’m speaking to the same thing you are. The people I reference as having true “extra” cash aren’t financing their lifestyles with their savings because their savings are so vast that none of these considerations is a factor. So, for example, if you have $75 million, you have to try to go broke. Macro circumstances, in and of themselves, can’t break you, unless your fortune is levered to the macro (e.g., you’re an oil trader or something). The only way for someone who made $75 million in the normal course of business (i.e., making proverbial widgets) to go broke is by subsequently making objectively terrible decisions. For that cohort, cash is “extra” in the same sense that a kindly neighbor’s Thanksgiving leftovers are extra: “Do you want some mashed potatoes? Because I’ve got extra,” means she has more mashed potatoes than she can realistically store or consume by herself. I don’t know what percentage of the money economists are counting as “excess savings” is comprised of those kind of fortunes. It could be a large percentage or it could be a small percentage (especially to the extent anyone with over $100 million likely has untraceable accounts), but my point is just that whatever that percentage is, it’s irrelevant to the macro outlook because spending trends for that cohort aren’t necessarily correlated with inflation or any other macro variables. If someone from that cohort wants a Porsche, they’ll buy a Porsche. Inflation could be 1% or 10%, but they’re still buying the car. The decision isn’t based on the ebb and flow of the economy, it’s based on something entirely irrelevant — like a wider wheelbase or a new spoiler design. It’s everyone else that counts from a macro perspective and as you say, I just don’t know how much runway we have there. It could be three months, six months or two years, but it’s not indefinite because those savings (lines of credit, as you very aptly call them) can be maxed out. That’s where I was drawing my distinction. A $75 million “savings” account is basically an open-ended credit line. The only way to max it out is to do something totally ridiculous. For that cohort, cash is just “fun coupons,” as DiCaprio’s Jordan Belfort put it. “Extra” in the truest sense.
I don’t see housing crashing but rather flattening because supply is scarce, demand is strong, and there is financing:
– we’re just not building (and Boomers aren’t downsizing) at a rate to change the market dynamics
– building during inflation, supply chain issues, and labor shortages is slow and expensive
– remote working makes a big difference to some percent of the professional class but the Working Majority have to live near where there’s jobs, the existing limited land/infrastructure urban centers
– Mortgages at 5% are still historically low
I think a big chunk of the population of the US has no savings buffer, even now. I recall the long lines of cars that we saw early in the pandemic waiting for free food at food banks. You saw a lot of late-model cars that did not scream “I’m poor.” But most of those cars were only a couple of missed payments away from being repossessed. The thing keeping people afloat is that by and large, anyone who wants a job can have one–for now.
I think it’s an important point that we don’t know what percentage of these savings are from the “rich.” Remember the “$400 emergency-expense data” survey?