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Household Excess Savings Still Worth ~5.5% GDP But Falling Quickly [2/3]

MARKET INSIGHT
  • The impact from the trends illustrated in the first part of this note has been a substantial increase in excess savings.
  • The topic of excess savings has again been brought up recently, with Kansas Fed’s George (a ’22 voter), noting Nov 22 that “high savings is likely to provide momentum to consumption and require higher interest rates" with “this excess saving and the distribution of those savings is going to be a key factor I think shaping the outlook for output for inflation and certainly for interest rates."
  • George estimated Americans continue to hold on to $2.3T in excess savings relative to pre-pandemic levels although recreating methodology from Fed research (here) suggests that this was the peak back in 3Q21 and that it has since eased to just under $1.5T as of yesterday’s Q3 data.
  • This is still substantial, equivalent to circa 5.5% GDP, but is down from a peak of 10% GDP and is still being chipped away at quickly even in USD rather than % GDP terms, with the savings ratio at historically lows – Q3 saw an almost $300B reduction.
  • Combined with prior downward revisions – Vice Chair Brainard noted Oct 10 that recent revisions imply the “stock of excess savings held by households is about 25 percent lower, which may imply a more subdued pace of consumer spending going forward than had been projected” – and it’s possible the continued drawdown could become a factor to lean on if the Fed looks to further slow the pace of rate hikes.

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  • The impact from the trends illustrated in the first part of this note has been a substantial increase in excess savings.
  • The topic of excess savings has again been brought up recently, with Kansas Fed’s George (a ’22 voter), noting Nov 22 that “high savings is likely to provide momentum to consumption and require higher interest rates" with “this excess saving and the distribution of those savings is going to be a key factor I think shaping the outlook for output for inflation and certainly for interest rates."
  • George estimated Americans continue to hold on to $2.3T in excess savings relative to pre-pandemic levels although recreating methodology from Fed research (here) suggests that this was the peak back in 3Q21 and that it has since eased to just under $1.5T as of yesterday’s Q3 data.
  • This is still substantial, equivalent to circa 5.5% GDP, but is down from a peak of 10% GDP and is still being chipped away at quickly even in USD rather than % GDP terms, with the savings ratio at historically lows – Q3 saw an almost $300B reduction.
  • Combined with prior downward revisions – Vice Chair Brainard noted Oct 10 that recent revisions imply the “stock of excess savings held by households is about 25 percent lower, which may imply a more subdued pace of consumer spending going forward than had been projected” – and it’s possible the continued drawdown could become a factor to lean on if the Fed looks to further slow the pace of rate hikes.