How long can shoppers keep spending their pandemic savings?

Consumer spending held the US economy up through 2022, in the face of the fastest monetary tightening in forty years. Real wages fell as food and energy prices rose, and households still flew, ate out and bought durable goods. The money came from the pile of excess savings built up during pandemic lockdowns, which the San Francisco Federal Reserve estimated peaked near $2.1 trillion in mid-2021. That cushion is finite, and households are running it down to cover the higher cost of living.

The drawdown is uneven across incomes. For the poorest households the pandemic buffer was mostly gone by late 2022, and they have gone back to credit cards and personal loans at high interest rates.

Where the money came from

The pile was built by two forces working at once. Lockdowns shut off spending on travel, restaurants and entertainment, while three rounds of federal relief, from the CARES Act in March 2020 to the American Rescue Plan a year later, sent cheques directly to most households. Income rose while the chance to spend it fell. Measured against the pre-pandemic trend of saving, the gap between the two is what economists call excess savings.

That definition matters. The estimate depends on what households would have saved without the pandemic, and different assumptions produce different totals, which is why estimates of what remains vary widely.

How long the savings last

What remains is concentrated in the top two income quintiles, where people spend a smaller share of their liquid wealth. These households are not using their savings to buy more everyday essentials. They keep up their discretionary habits and pile cash into money market funds that yield 4.5 per cent.

Econometric models suggest that at the current rate of $100 billion a month, the broad excess savings cushion will be gone by the middle of 2023. After that, consumer spending will have to track real disposable income again.

The strain already shows in the flow of saving. The personal saving rate has fallen to its lowest level since the mid-2000s, which means households are putting aside far less of each month's income than they did before the pandemic, as well as spending down the stock. Credit card balances have climbed sharply this year, according to New York Fed data, as households lower down the income scale replace savings with borrowing.

The wealth cushion shrinks too

Savings are not the only buffer under pressure. The S&P 500 is heading for its worst calendar year since 2008, and bond funds have lost money alongside it, so the paper wealth that encouraged affluent households to spend freely in 2021 has shrunk. Economists have long found that spending follows wealth with a lag, which means this year's losses will weigh on next year's purchases.

Housing tells a similar story. Thirty-year mortgage rates have gone from just over 3 per cent at the start of the year to more than 6 per cent, sales of existing homes have fallen for most of 2022, and the refinancing boom that let homeowners cut their monthly payments or withdraw equity has stopped. Households that had counted on rising house prices as a second savings account have lost access to it just as the first one empties.

Echoes of 1946

The closest precedent comes from the end of the Second World War. Americans had saved heavily during the war, when rationing limited what they could buy, and they spent those savings quickly once controls were lifted in 1946. The burst of demand helped push inflation into double digits, and a recession followed in 1948 after the pent-up spending had run its course.

The parallel is imperfect, since the post-war economy was also retooling from military to civilian production. It does suggest that a savings-fuelled boom ends when the savings end, and that the Fed should not mistake one-off spending power for durable demand.

Winners, losers and the case against

The drawdown does not hit every business equally. Firms selling to affluent households, such as airlines, hotels and premium brands, can lean on customers who still have a buffer. Discount retailers, used-car dealers and consumer lenders serving lower-income borrowers face shoppers who are already out of savings and paying high rates on revolving debt.

The strongest case against a spending slump is the labour market. Unemployment is near a half-century low and nominal pay is rising at about 5 per cent a year, while inflation has started to ease. If prices slow faster than wages, real incomes will begin rising again next year and could take over from savings as the source of spending without a sharp break. That is a plausible path. It requires the labour market to stay tight for longer than the Fed intends.

A second risk sits on the calendar. The pause on federal student loan repayments, in place since March 2020, has been extended again while the courts review the administration's forgiveness plan. When payments resume, millions of households will face a new monthly bill at the moment their savings run out.

Spending meets the slowdown

That will happen just as the delayed effects of rate rises reach the wider labour market. As hiring freezes spread from technology and finance into other services, households will have no savings buffer left to absorb a downturn.

The data to watch are the monthly personal income and outlays report, which shows the saving rate and real disposable income, and the New York Fed's quarterly household debt report, which tracks card balances and delinquencies. Retailers that built five-year growth plans on pandemic spending patterns face an abrupt correction. The consumer strength that surprised forecasters in 2022 was paid for with one-off savings, and when those run out around the middle of 2023, spending will probably fall back to what real incomes can support, taking retailers' growth plans down with it.