Excess savings US households built up during the pandemic will probably be exhausted in the current quarter, according to research from the Federal Reserve Bank of San Francisco, removing a key support for consumer spending that has boosted the US economy this year.
“Our updated estimates suggest that households held less than $190 billion of aggregate excess savings by June,” San Francisco Fed researchers Hamza Abdelrahman and Luiz Oliveira said in a blog post published Wednesday on the bank’s website.
“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.”
Earlier this year, Abdelrahman and Oliveira published research estimating $500 billion of excess savings remained on household balance sheets as of March 2023, after peaking at $2.1 trillion in August 2021.
But revisions to government data since then have changed the picture.
“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 pair said in Wednesday’s blog post.
“The combined revisions brought down the Bureau’s measure of aggregate personal savings by more than $50 billion. In addition, second-quarter data indicate that household spending continued to grow at a solid pace.”
By most accounts, excess savings accumulated during the pandemic have helped the US economy continually defy forecasters’ expectations for a downturn this year, even as the Fed has embarked on the most aggressive cycle of interest-rate increases in several decades.
At their July 25-26 policy meeting, central bank officials acknowledged the impact, while also suggesting that the dynamic could soon fade, according to minutes of the gathering published Wednesday.
“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,” the minutes said.
“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.”