The anticipated financial buffer provided by accumulated cash savings, intended to support the economy, has been depleted due to inflation eroding the excess savings of U.S. households, according to an analysis by Bespoke.
Consumers amassed substantial cash balances during the pandemic, resulting from reduced spending and government-issued stimulus checks. Initially perceived as a cushion for the slowing U.S. economy, this cash was expected to provide consumers with flexibility to sustain spending amidst tightening financial conditions.
However, Bespoke argues in a note that these expectations are misguided, as inflation has significantly diminished the purchasing power of household savings for the majority of Americans.
While households may nominally possess a greater amount of savings than pre-pandemic, this perspective changes when examining cash savings as a percentage of total consumption, factoring in the additional strain on consumers caused by rising prices.
When assessing money market and deposit assets as a percentage of total consumption, most Americans find themselves in a situation similar to that of 2019.
According to Bespoke, "For all but the highest earning and most wealthy households ... cash holdings relative to consumption are basically back to where they were in 2019. In other words, there is no dry powder of cash left to fund consumption growth, especially given the fact that the highest and wealthiest consumers are not cash-constrained for consumption in the first place."
Further indications of deteriorating financial health among consumers include a record high in credit card debt last year and the resumption of student loan payments after a three-year hiatus. This resumption may pose challenges for many individuals in meeting financial obligations while sustaining a robust spending pace.
A potential slowdown in spending could pose risks to the U.S. economy, which still faces a notable risk of recession in 2024. Macquarie strategists, in a November note, warned that a reduction in consumer spending could lead to a consumer-driven economic slowdown.
