Inflation is forcing people to use up their savings – a bad sign for the economy

It turns out that Americans don’t have a big pile of savings to help them weather high inflation or another recession.

The US savings rate fell to a 14-year low of 3% in June and was still just 3.5% at the end of August, updated government figures show.

That’s a lot lower than previously reported — and it could have major implications for whether the economy can avoid a second recession in four years.

Many economists believed that households had enough savings to deal with rapidly rising prices. Inflation has risen by 8.3% over the past year, the fastest increase since the early 1980s.

Some even thought relatively high savings might allow Americans to spend enough to stave off a looming recession. Consumer spending drives about 70% of what goes on in the economy.

But the government’s annual review of budget finances suggests Americans have far fewer cushions than previously thought.

Just last month, the government reported a savings rate of 5% in July. And at the end of 2021, the savings rate was a relatively high 8.7%.

Newly revised data put the savings rate much lower. The savings rate was just 3.5% in July, compared to a revised 7.5% in December.

The lower savings rate might not be a big deal if it were simply the result of government miscalculations. What’s even more worrying is how quickly it fell.

High inflation deserves much of the blame, economists say.

“The hardship caused by inflation means consumers are using their savings to fund their spending,” said EY Parthenon chief economist Gregory Daco.

Even the current savings rate may overstate Americans’ ability to spend. Most of the savings are in the hands of small businesses and higher-income Americans. Middle class and poorer people have fewer savings and therefore fewer opportunities to spend money.

But economists aren’t convinced that Americans used up the bulk of savings during the pandemic, as the federal government handed out trillions of dollars in benefits.

Pantheon Macroeconomics chief economist Ian Shepherdson estimates that Americans have depleted about 30% of their pandemic savings, but there is still $1.4 trillion or more in “excess” savings available. Some suggest that the pool of savings is even greater.

That’s “more than enough to stave off recession next year if people choose to shut it down,” he said.

The problem is that recessions make people save more in case something bad happens to them. For example, losing a job or being faced with an unexpected medical or other bill.

“Consumers will face tough times in 2023, and they may scale back spending as the job market softens and the broader economy slides into recession,” said PNC Financial Services chief economist Gus Faucher.

https://www.marketwatch.com/story/inflation-is-forcing-people-to-use-up-their-savings-in-a-bad-sign-for-the-economy-11664565703?rss=1&siteid=rss Inflation is forcing people to use up their savings – a bad sign for the economy

Brian Lowry

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