US Households Deplete Savings as Wealth Gap Widens
Recent findings from a Federal Reserve study have raised concerns about the potential for an economic downturn in the United States. The study reveals that the majority of American households are rapidly depleting the excess savings they had accumulated during the Covid-19 pandemic.
According to the study, the liquid assets of the lower 80% of American households, based on income, have dipped below their levels in March 2020, once inflation is taken into account. All income groups have witnessed a reduction in their real-term savings since their peak in 2021.
While the wealthiest 20% of households still maintain cash savings at roughly 8% above their pre-pandemic levels, the bottom 40% of households have experienced an 8% decline in their savings. Even the middle-class, constituting the next 40%, has seen their cash savings fall below pre-Covid levels in the last quarter.
The Federal Reserve Bank of San Francisco anticipates that the aggregate stock of excess savings will likely be fully depleted in the current quarter. This depletion of pandemic savings among the majority of American households could have significant implications for the U.S. economy.
Consumer spending, which accounts for approximately 70% of the U.S. GDP, may experience a sharp decline as savings dwindle. This decrease in spending power has the potential to slow down economic growth, particularly impacting sectors that rely heavily on discretionary spending.
Michael Wilson, an equity strategist at Morgan Stanley, has voiced concern over the U.S. stock market due to weakening discretionary spending as households deplete their pandemic savings. The SPDR S&P 500 ETF Trust has already shown signs of decline in September, falling by 4.4% so far, its worst month of the year.
While wealthier households with excess savings may contribute to some economic activity, it is unlikely to fully offset the decline caused by the majority of American households.
In conclusion, the depletion of pandemic savings among American households is posing a threat to the U.S. economy. As savings dwindle, consumer spending power declines, which could lead to a potential economic slump. The widening wealth gap and reduced spending in discretionary sectors may further exacerbate the situation. It remains to be seen how the U.S. government and policymakers will address this issue and mitigate any adverse effects on the economy.
