San Francisco Fed Warns That Americans Are Running Out of Excess Savings This Quarter

Buying take-out at work every day might be taking money out of your potential savings. Muse Studio/Shutterstock

The Federal Reserve Bank of San Francisco warned that Americans were burning through excess savings they accumulated from the pandemic.

Most households received stimulus money from the federal government during the height of the pandemic from 2020 to 2021, which encourage spending.

Excess savings peaked at $2.1 trillion in August 2021, which exceeding the projections from before the pandemic.

American households began to draw from their stimulus era excess savings more rapidly starting in 2022 as inflation began to skyrocket.

The loss of stimulus cash savings will remove a vital safety net that allowed millions of families to remain solvent through an era of high inflation.

Stimulus Cash Reserves Expected to Depleted By September

After rapidly accumulating “unprecedented” levels of excess savings during the pandemic, San Francisco Fed researchers Hamza Abdelrahman and Luiz Oliveira said, “Our updated estimates suggest that households held less than $190 billion of aggregate excess savings by June.”

According to data from the San Francisco Fed, most Americans could deplete that cash reserve by the end of the third quarter in September.

“There is considerable uncertainty in the outlook, but we estimate that these excess savings are likely to be depleted during the third quarter of 2023.”

Withdrawals averaged about $100 billion per month and totaled $1.9 trillion as of June 2023, according to the study.

Mr. Abdelrahman and Mr. Oliveira noted that consumers were spending well beyond their means in the last quarter of 2022 through the first quarter of 2023.

“The Bureau of Economic Analysis recently revised its previous estimates to show household disposable income was lower and personal consumption was higher than previously reported for the fourth quarter of 2022 and first quarter of 2023,” the two researchers said.

“The combined revisions brought down the Bureau’s measure of aggregate personal savings by more than $50 billion,” they added.

“The rapid accumulation and subsequent drawdown of excess savings following the onset of the pandemic recession contrasts starkly with prior recessions,” the researchers noted.

Fed Policymakers Concerned About Drawdown in Savings

The latest news from San Francisco is becoming a concern for policymakers, as the Federal Reserve credited excess stimulus cash for keeping the economy afloat in the face of high inflation and interest-rate hikes.

Strong American spending habits have kept the country from entering into a deep recession, and now fears are increasing of an economic downturn, as consumer spending is a key engine of growth.

Fed policymakers now expect a slowdown in consumer spending in coming months as cash runs dry across the country.

“Tight financial conditions, primarily reflecting the cumulative effect of the committee’s shift to a restrictive policy stance, were expected to contribute to slower growth in consumption in the period ahead,” according to the Fed’s meeting on July 25–26, released on Aug. 16.

“Participants cited other factors that were likely leading to, or appeared consistent with, a slowdown in consumption, including the declining stock of excess savings, softening labor market conditions, and increased price sensitivity on the part of customers.”

Despite falling from its 9.1 percent peak in June 2022, consumer prices rose 3.2 percent last month, the first uptick after thirteen months of falling rates.

Households Depend More on Credit Cards for Everyday Expenses

As personal savings decline, Americans are relying more on their credit cards to cover everyday expenses, racking up over $1 trillion of debt at the end of the second quarter, according to data from the Federal Reserve Bank of New York.

From April to June, total credit card debt surged to $1.03 trillion, an increase of $45 billion, or 4.6 percent more from the first quarter, marking the highest level on record going back to 2003.

The record-high debt is a major reversal from the pandemic, when households were rapidly paying off credit card debt with their stimulus payments.

Credit card delinquency rates still remain low, but there has been a an uptick in households struggling with credit card and auto loan payments, at 2.7 percent by the end of June, a 0.1 percent increase from the previous quarter and 2 percent lower from the last quarter of 2019.

Analysts say that any increase in delinquencies during a strong labor market is a problem and it is only expected to climb, as student loan payments resume in the fall after the U.S. Supreme Court struck down the White House student debt bailout plan.

Some Analysts Are More Positive About Remaining Savings

However, Mark Zandi, chief economist at Moody’s Analytics, said on Aug. 17 that he has doubts that excess savings will be depleted by the end of the quarter. He believes that remaining savings will end up close to $1 trillion in September.

“Our estimate is consistent with deposits held by consumers,” Mr. Zandi said in a series of posts on X, the platform formerly known as Twitter.

“They surged during the teeth of the pandemic, and have been winding down since late 2021 as high inflation bit into real incomes.”

“But deposits are still well above what they would have been based on pre-pandemic growth,” he added.

Mr. Zandi thinks the concerns over the amount of excess savings held by households is “quickly becoming less important.”

“That’s because of the easing in inflation, income growth is now stronger than inflation,” Mr, Zandi continued, adding “The need for excess savings to support continued sturdy consumer spending is thus fading.”