US consumers have been content to stockpile during pandemics.
And this drag presents a challenge for the economy in 2023.
New data from JPMorgan Asset Management published on Monday show that “excess savings” from American households has now reached $900 billion, down from a peak of $2.1 trillion in the beginning of 2021 and about $ 1.9 million at the beginning of last year.
These savings have already been pulled down as personal income has fallen sharply from the highs seen during the pandemic.
The latest data on personal income and spending from the BEA, released on December 23, showed that personal savings stood at 2.4% in November, in down from a high of 33.6% in March 2020.
The stimulus programs launched during the pandemic saw an increase in household savings, which typically hovered between 7% and 9% of income in the years before the pandemic.
Households saved more than 10% of their income each month between March 2020 and May 2021, creating a multi-trillion dollar savings pool that will tap into the future.
And that future is now.
As noted over the past two years, these consumer savings have boosted spending, even reaching 40-year highs. inflation and a weakened labor market.
But with no new stimulus programs imminent and the economy showing signs of feeling the effects of the Federal Reserve’s tightening, the potential for American consumers to fuel rapid growth may end.
Writing after last month’s report on personal income, Oren Klachkin and Ryan Sweet at Oxford Economics said that “this is a historic low. [personal savings rate] this indicates that families have packed away a lot of their dry powder.”
Klachkin added: “We believe this tail will disappear next year.”
The exact speed, size, and scope of the economic impact of the slow withdrawal of savings, however, remains a matter of speculation.
In a piece looking at the US economic outlook for 2023 last month, Ian Shepherdson wrote in Pantheon Macroeconomics: “The only reason to delay before seeing a recession, because the private sector is still sitting on a lot of cash accumulated during the pandemic.”
Shepherdson said that savings began last spring due to high gas prices for consumers across the country. By June 2022, the average price of gas was over $5 a gallon.
In Shepherdson’s opinion, it seems that the bottom 40% of workers lost all the savings they had accumulated during the pandemic. This suggests that the rate at which consumers spend their remaining savings will slow, as those on the the higher end of the income distribution is more likely to hold back on the accumulation of debt.
And while “more savings” will remain part of the economic conversation next year, Shepherdson sees the most important driver of shopping habits coming back to the forefront as main focus on spending in 2023: the labor market.
“The biggest problem for consumers next year is likely to be the softening of the labor market,” Shepherdson wrote. “The boost to job growth from the reinvestment of COVID has slowed in the past year, and can be expected to disappear completely next year.”
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