- New data shows Americans have already spent a third of their pent-up savings.
- That’s almost three times more than previously thought, and spending will soon slow down.
- Retailers are adjusting accordingly, but the data suggests a recession is increasingly likely.
The financial cushion protecting Americans from skyrocketing inflation is smaller than previously thought. As savings decline, the risks of a severe recession increase.
Household finances are in a worrying decline. Savings soared early in the pandemic as an unprecedented stimulus and weak in-person spending left Americans with more cash to stash. This trend peaked in mid-2021 when the economy reopened and spending rebounded. Soaring inflation has led many people to dip into their savings to afford everyday basics, and as prices continue to soar, the cash reserve has continued to dwindle. .
The situation is even worse than previously thought. August data showed that US households had spent about $270 billion out of a savings cushion of $2.4 trillion, according to the Bureau of Economic Analysis. This equates to about 11% of that extra accumulated cash that has been spent since balances began to decline last year.
But recent revisions paint a darker picture. According to newly revised statistics released on September 30, the savings cushion peaked at just $2.1 trillion in August 2021, and about $630 billion – or 31% – of that cushion has been spent.
This small cash cushion signals that “the risk of recession is higher than we previously thought,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a Monday note.
If households begin to cut spending and support their declining savings, it could remove a much-needed engine of economic growth.
“The risk has increased that people will not be prepared to reduce their savings sufficiently and quickly enough to keep consumption at a sufficient pace to offset weakness elsewhere,” Shepherdson said.
Several retail giants are already expecting the downturn to materialize. Walmart and Target both announced last month that their holiday promotions will begin in early October in a bid to entice shoppers put off by soaring prices. Amazon, meanwhile, has announced its own deals event for Prime members from October 6-8 in a bid to compete with its brick-and-mortar peers.
By offering deals earlier, inflation-conscious shoppers can spread their vacation purchases over multiple pay periods so they don’t stretch their finances too much.
“We know that price is a priority for Walmart customers and will continue to be an important consideration as we approach the holiday season,” Walmart spokesman Nick DeMoss told The Washington Post. in September. “Customers buy early and finding the lowest prices is a top priority.”
Despite the early discounts, dwindling American savings will likely lead to a weaker holiday spending boom. Retail sales are expected to grow only 4% to 6% between November 2022 and January 2023, Deloitte said in a September report. This is down from the 15.1% gain recorded during the same period last year.
The writing has been on the wall for some time. Inflation-adjusted spending at retailers and restaurants has been down since April, aside from a surprise rise in August. This means that households generally spend less, even though high prices encourage many to hoard more money for the same necessities.
The savings crisis alone does not guarantee a recession. Easing inflation could help Americans’ savings go further, and a rebound in the stock market could give households some flexibility to spend more.
Still, it’s unclear “where the reduction in savings will end” since household finances “have never looked like this,” Shepherdson said. If the current trend continues, a drop in spending could push the United States into a dark recession, and households will have less room to maneuver to weather the storm.
“Sustained strength in consumption will therefore be essential to keep the economy out of recession. We are less confident about this than before the release of the revised savings data,” Shepherdson added.