The aggressive fiscal response to the COVID-19 pandemic, along with an abrupt decline in consumer spending during the lockdowns of early 2020, led to an unprecedented buildup of household savings that peaked in mid-2021. Excess savings is an estimate of the additional money households stashed away compared to what they otherwise would have assuming a continuation in the pre-pandemic savings rate trend.
Recent research from the San Francisco Federal Reserve Bank suggests that excess savings have now been fully depleted, having fallen at a gradual pace since peaking at $2.1 trillion in August 2021. Household consumption wields a heavy influence on the overall economy, and that excess savings — along with strong employment and robust wage gains — played a key role in fueling demand for goods and services over the past few years. Looking ahead, the absence of excess savings means that consumers will be much more dependent upon current income to fuel spending. Wage growth has also slowed over the past year, as the demand for workers has softened.
Growth in household credit outstanding alongside a rise in delinquency rates for auto loans and credit cards also suggest that excess savings are largely depleted. Collectively, these factors contribute to a more benign outlook for consumer spending and suggest that cracks may be forming in the U.S. economy.
The bottom line? Consumers appear to be feeling the pinch of tighter conditions, as evidenced by back-to-back weak reports on retail sales for April and May. A convergence of factors, including the exhaustion of the pandemic-era cash stockpile, appears to be reining in consumer spending and, in turn, taking the froth out of growth more broadly.
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