MNI INTERVIEW: US Consumer Savings To Underpin Demand Into '24

Excess savings accumulated during the pandemic will help fuel American consumer spending into the first half of next year, longer than previously thought, with the implication that demand-driven inflation will remain elevated for longer, economists Luiz Oliveira and Hamza Abdelrahman of the Federal Reserve Bank of San Francisco told MNI.

The level of personal savings in excess of what might have been expected had the pandemic not occurred gives some indication of how consumer spending could evolve in coming months and helps inform discussions on inflation dynamics in the short run, Oliveira and Abdelrahman said.

Strong household demand for goods and services has "significantly contributed to inflationary pressures over the last couple of years," the economists said in an interview. "If demand continues to be strong going forward, we can expect demand-driven inflation to remain elevated."

The economists in August estimated that U.S. consumers were on track to have burned through all their excess pandemic savings by the third quarter, but comprehensive revisions to the Bureau of Economic Analysis's national economic data in September significantly lengthened their projections.

"Intuitively, you could say that households have 'saved more' over the last three years than what the initial data suggested," the economists said. Relative to previous recessions, households had amassed a peak USD2.1 trillion by August 2021 as fiscal programs boosted incomes. By September of this year, that number had fallen to about USD430 billion.

DRAWDOWN ACTUALLY SLOWER

The pace of drawdown on household savings is also running slower than previously believed, at an estimated USD75 billion per month compared to USD100 billion a month before the BEA revisions, the economists found. If this rate persists, excess savings are likely to remain available in the overall economy until sometime in the first half of 2024.

A Bank of America analysis of consumer spending also suggests households’ checking and saving account balances remained elevated relative to the pre-pandemic period as of last month.

The analysis comes with a large set of uncertainties, the economists cautioned. It's hard to predict how households will spend their savings. The pace of drawdown could decelerate as the aggregate stock gets closer to being depleted, and higher debt servicing costs could also dampen spending. Alternatively, the pace of drawdown could pick up in the holiday shopping season, they said.

Consumers are also increasingly funding their spending through credit, according to New York Fed data.

Some analysts speculate that higher income groups holding excess savings are less likely to spend, but Oliveira and Abdelrahman noted that households across the spectrum held more liquid assets in the first half of 2023 compared to the pre-pandemic period, though it was especially true for households in the lowest 20% of the income distribution.