Consumers have spent nearly all of their excess savings from the Covid-19 pandemic, and that money is likely to dry up in the third quarter of 2023, according to research from the Federal Reserve Bank of San Francisco.
The stimulus checks, enhanced unemployment benefits, student loan payment moratoriums and eviction protections during the pandemic made American consumers feel flush with money, as they were in a position to have excess discretionary income and savings. Many people changed the way they spent their newly gained money.
Online retail sales skyrocketed, as people were stuck at home for two-plus years, facing limits on traveling and going to events, concerts and sports arenas. Many consumers spent their “unprecedented” excess savings on cars, appliances, electronics and home furnishings.
A meteoric increase in speculative investing was paid for with extra savings, as Americans were bored, stuck inside and isolated. People started purchasing highly speculative investment products, such as NFTs, meme stocks, cryptocurrencies and whatever the newest offering was touted on Reddit’s WallStreetBets subreddit.
Excess savings peaked at $2.1 trillion in August 2021. However, the Fed found that households held less than $190 billion of aggregate excess savings in June. This has serious ramifications for the economy and job market.
What Happens When The Money’s All Gone
Bloomberg reported that consumers are spending big on services such as travel and leisure, according to data from Citigroup. Families have been changing their spending habits to enjoy traveling and experiences, such as dining out at restaurants and attending in-person events, such as Taylor Swift and Beyoncé concerts and sporting events.
Consumers and the economy will adjust to more normal household balance sheets and spending power based on incoming wages and salaries rather than temporary government transfers. There will be discretionary spending. With those pandemic savings spent down, consumers may have less ability to make significant purchases, like buying a home or investing.
There will be a shift in spending patterns. During the pandemic, spending on services fell dramatically due to social distancing, while goods spending rose, according to Deloitte. As excess savings are depleted, spending on services may rise again, while demand for goods levels off.
There’s a potential drag on economic growth when consumers have less savings and pull back spending, due to inflation, higher costs and worries over a possible recession. Household spending will rely more on incoming salaries rather than drawing down past savings.
The Fed may not need to be as aggressive in fighting inflation now that excess savings are depleted, and consumer demand is cooling naturally.
Job Cuts, Hiring Freezes And Shifts In Spending
When consumers drain their excess pandemic savings, they’ll change their spending habits and become more conservative. A more frugal mindset will impact spending, causing a demand reduction, which can adversely affect the economy and job market.
We’ll Likely See The Following Play Out
- As consumers spend less on goods, services and discretionary purchases, businesses will see a fall in sales, revenue and profits. The hardest hit will be in sectors that benefited from stimulus-induced profligate spending.
- With less spending and companies becoming more cautious, we’ve already seen large-scale layoffs, hiring freezes and jettisoning of full-time, permanent employees and replacing them with gig or contract workers that are paid less, don’t receive health and other benefits and can be fired at any time.
- The stock market has already seen a decline and may continue to dip downward. As companies earn less profits, their share prices will be worth less.
- There is a risk that many venture capital-backed startups will fail or just plod along due to the higher costs of acquiring capital. To cut costs, companies will downsize, hiking up the unemployment rate.
- The gross domestic production will decline as consumers’ consumption and expenditures are lower. As the GDP declines, so will the overall economic and job growth.
Source: Forbes
