Americans are still sitting on half a trillion in excess savings, a stash that could support consumption through the end of the year.
That was the overarching takeaway from a new economic “letter” published early this week by the San Francisco Fed, an institution which, the critics among you might argue, would be better off devoting staff time to bank oversight than macro research.
Estimating what remains of pandemic cash buffers became a veritable obsession after inflation began to accelerate in the US. Methodologies vary and estimates do too.
Last year, I used simple math and Fed data to suggest lower-income cohorts had less in the way of readily available cash than they did prior to COVID, but frankly, it’s impossible to know with anything approaching certainty what is and isn’t the case with regard to these alleged “buffers” across demographic cohorts. It looks, to me anyway, like some aggregates might’ve been altered recently to expand the definition of a “liquid” asset, but I’m not sure of that, and it’s not especially relevant for our purposes here.
Even if it were possible to say something definitive about cash levels (or “liquid” asset levels), forecasting means incorporating consumer psychology and inflation expectations, which ends up being an exercise in question-begging given that both ultimately impact corporate pricing power and thereby inflation itself, which in turn means the cash buffers you’re trying to estimate are a moving target.
In short: This is a mostly futile endeavor. And anyone who tells you otherwise is a person who’s probably wasted a lot of time recently.
With that in mind, the San Francisco Fed looked at “the accumulated difference between actual savings and the pre-pandemic trend,” with the latter defined by a simple linear regression. On the bank’s estimates, nominal accumulated excess savings topped $2 trillion by August of 2021, after exploding above the trend line.
Beginning the very next month, households started dipping into that reservoir, initially at a relatively slow pace, then at a brisker rate of around $100 billion per month last year.
Ultimately, that process resulted in a $1.6 trillion drawdown, leaving behind the above-mentioned $500 billion, which researchers Hamza Abdelrahman and Luiz Oliveira suggested “could continue to support consumer spending at least into the fourth quarter of 2023.”
Note from the visual that this time is indeed different. As Abdelrahman and Oliveira wrote, “the rapid accumulation and subsequent drawdown of excess savings following the onset of the pandemic recession contrasts sharply with the gradual increase in excess savings observed in past recessions [when] savings appears to plateau after three or four years instead of quickly reverting toward their respective pre-recession trends.”
That’s not terribly difficult to explain. The scope of the fiscal impulse associated with the pandemic rescue packages was unprecedented, and the “revenge spending” phenomenon associated with the lifting of lockdowns was unique. Additionally, you’re more comfortable burning through a cash buffer when your home equity is up 30% in 18 months and your 401(k) is too.
Still, it’s notable that, according to Abdelrahman and Oliveira, “the stark contrast between the pandemic recession and prior recessions holds true” even when you adjust for inflation. So, it’s not prices, apparently.
The upshot is that Americans across the income distribution probably have considerable leftover liquid cash (according to the authors, who readily admit there’s “a great deal of uncertainty surround[ing] precisely how the savings are distributed across household income levels”) .
Americans being the incorrigible spendthrifts they are, those funds will likely go towards consumption, even if, as Abdelrahman and Oliveira suggested, some households might’ve rediscovered the virtues of frugality and savings as a result of the shock.
If spending holds up, that’s good news to the extent it suggests a recession can still be avoided. It’s also bad news for the exact same reason. After all, only a deep recession can slay the 2020s inflation dragon. That’s according to Paul Volcker who, if you go by the subtext of the prevailing macro narrative, somehow managed to dole out a lot of policy advice last year, an extraordinary feat considering his circumstances.
I hope there are some savers out there with all this “excess “
Best I understand they’re taking satellite-level macro snapshots of a process better looked at from a cloud-level analysis of what individuals are doing on the ground; individuals who don’t even themselves know. I don’t know if we spent ours yet or not. I think we have, actually, what with the uninsured dental bills lately. And it’s easy to believe there’s still a half trillion out there, but I can’t imagine it’s now likely to be spent in any measurable sense. The signal-to-noise ratio was low for the first months (e.g., stimulus + tax credits = lowered child poverty rates), but with each passing month the measurements get less reliable.
‘considering his circumstances” – Brilliant!
My reaction is, if Americans had $2TR of excess savings, and spent $1.5TR, who is more likely to have spent more of their excess savings – the low income or the high income? I think low income. Then, if most of the remaining $0.5TR is in the bank accounts of the high income, does a slowing/recessionary economy make them more or less likely to spend it? I think less likely. Put another way, I think the “velocity” of that money may be low.
Many higher income people I know spent liberally in 2022, as we emerged from Covid. By now, they’ve taken their international trips, bought their toys, and had enough expensive meals for awhile, and are stepping back and assessing both sticker shock and the economic winds. Maybe I’m just projecting, but consumer spending has been pretty tepid.