Why Depleted ‘Excess Savings’ Aren’t an Economic Headwind

Is the savings glut running dry? According to a widely circulated San Francisco Fed study last month, US households will deplete their $2.1 trillion of “excess savings” accumulated during the pandemic this quarter.^[i] This has some warning that, if accurate, it will slam consumption—and mean it is game over for growth. But not so fast. We see several factors that make such a conclusion unlikely. Let us explain.

As you likely know, the combination of lockdowns’ limiting spending options and several rounds of government stimulus boosted the US savings rate ginormously in 2020 and 2021, leading to the accumulation of much more savings than would normally have built up. The San Francisco Fed’s research suggests households have been spending down these “unprecedented” pandemic-era savings since August 2021.

While the drawdown was slow at first, it accelerated to around $100 billion a month in 2022, with excess savings—the amount above what they estimate savings would have been without the lockdowns’ effect—falling to $500 billion in March this year and then to about $190 billion in June. The research then extrapolated this bleed forward. While it acknowledged there is “considerable uncertainty” in the projections, “Should the recent pace of drawdowns persist—for example, at average rates from the past 3, 6, or 12 months—aggregate excess savings would likely be depleted in the third quarter of 2023.” Note though, the paper didn’t draw any large macroeconomic conclusions from this. It didn’t argue these savings drawdowns are keeping the economy afloat—or suggest trouble loomed if the extrapolation proved correct and those excess savings dried up.

But into that void stepped pessimistic pundits. Unsurprisingly, many seized on the findings, arguing that absent this cushion, the economy is in trouble. Blending old fears into a patchwork Frankenstein’s monster, they grab from a bag of rising credit card delinquencies, student loans payments restarting, higher oil prices, strikes and a looming government shutdown, etc., and argue without excess savings to tap, consumption is doomed. But the underlying premise—households have nothing left in the tank—is worth examining: Are fears growth is about to sputter valid? If not, we would submit that reality is underappreciated—and there is more wall of worry for stocks to climb.

In this regard, we find several holes in the out-of-gas and overspent American theory underpinning many fears today. For one, household wages and incomes are rising. Exhibit 1 shows all private employees’ aggregate weekly payrolls—their average hourly earnings multiplied by their aggregate weekly hours worked. So lumping together how much everyone worked—and what they were paid—aggregate payrolls rose 6.1% y/y in August, above the long-term average of 4.0% and ahead of CPI’s 3.7% headline inflation rate.^[ii] Similarly, the Atlanta Fed’s Wage Growth Tracker—which keeps tabs on how individual workers’ earnings (versus aggregate averages) fluctuate over time—climbed 5.3% y/y in August.^[iii] Workers are seeing gains individually, as well as on the whole.

Exhibit 1: Aggregate Payrolls Rising

Source: Federal Reserve Bank of St. Louis, as of 9/21/2023.

How about take-home pay after taxes and inflation, excluding government transfer payments—e.g., Social Security and unemployment insurance, but also boatloads of emergency assistance during COVID lockdowns? Exhibit 2 shows this category (real disposable personal income less transfers) rising, too. Through the latest data as of July, this was running at 4.6% y/y and making new highs.

Exhibit 2: Without Transfers, Inflation-Adjusted Disposable Income Hitting New Highs

Source: Federal Reserve Bank of St. Louis, as of 9/21/2023.

Households’ net worth is also hitting record highs. As Exhibit 3 shows, Americans’ wealth exceeded Q1 2022’s peak in the second quarter, at just around $146 trillion now (green line). This is the value of assets people own (financial and nonfinancial; blue columns) net of their liabilities (yellow columns). Households’ assets exceed their indebtedness by record amounts.

Exhibit 3: Household Balance Sheets at Record High

Source: Federal Reserve Bank of St. Louis, as of 9/21/2023.

Then too, not only do assets back debt several times over, but as Exhibit 4 shows, household incomes are more than enough to service debt payments and other household financial obligations (rent, property tax and homeowners’ insurance). Disposable personal income is covering debt service to a greater degree than any point prepandemic. No wonder credit markets signal little financial stress among households. Meanwhile, inflation has cooled and should continue to, irregularly. Interest rates are unlikely to keep climbing for long if inflation rates trend lower, helping ease debt service further.

Exhibit 4: Households’ Financial Load Light by Historical Standards

Source: Federal Reserve Bank of St. Louis, as of 9/21/2023.

Now, none of this means households will spend, or that there are no headwinds. While inflation has slowed, the level of prices is still considerably higher in several categories, leaving many with sticker shock and struggling. Student loan payments’ resumption also presents additional challenges to some. But overall and on average, the data suggest Americans aren’t doomed to household austerity without lockdown-driven savings’ cushion.

Finally, while we understand the focus on consumer spending given its dominant share of GDP, an underappreciated reality is it is much more stable overall than business investment or exports. Those tend to swing growth at the margins. But US consumption seems sturdier than many think—and rumors of its demise appear greatly exaggerated to us.