US Households Have Depleted Their Pandemic Savings: Study Highlights Risk Of Economic Downturn

Recent findings from a Federal Reserve study have raised concerns about the potential for an economic downturn in the United States.

These findings suggest that the majority of American households are rapidly depleting the excess savings they had accumulated during the Covid-19 pandemic.

The study, as reported by Bloomberg, suggests that the liquid assets of the lower 80% of American households, based on income, have dipped below their levels in March 2020, once inflation is taken into account.

Diminishing Savings Across Income Groups

The study reveals that all income groups have witnessed a reduction in their real-term savings since their peak in 2021.

Notably, the wealthiest 20% of households still maintain cash savings at roughly 8% above their pre-pandemic levels, Bloomberg reports.

In contrast, the bottom 40% of households have experienced an 8% decline in their savings, while the middle-class, constituting the next 40%, has seen their cash savings fall below pre-Covid levels in the last quarter.

The Federal Reserve Bank of San Francisco even anticipates that the aggregate stock of excess savings will likely be fully depleted in the current quarter.

Implications For The US Economy

While household net worth surged by $5.5 trillion during the April-June period, predominantly fueled by housing and stock investments, diminished consumer spending power could trigger a potential economic slump, according to the report.

Michael Wilson, an equity strategist at Morgan Stanley, voiced concern over the U.S. stock market on account of weakening discretionary spending as households deplete their pandemic savings.

The SPDR S&P 500 ETF Trust SPY has risen 13% year to date, but in September it has so far fallen by 4.4%, its worst month of the year.

The depletion of pandemic savings among the majority of American households has significant implications for the U.S. economy. Consumer spending, which accounts for approximately 70% of the U.S. GDP, may experience a sharp decline as savings dwindle.

This decrease in spending power has the potential to slow down economic growth, particularly impacting sectors that rely heavily on discretionary spending, such as the Consumer Discretionary Select Sector SPDR Fund XLY and the Communication Services Select Sector SPDR Fund XLC.

While wealthier households with excess savings may contribute to some economic activity, it is unlikely to fully offset the decline caused by the majority of American households.

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