According to a recent Federal Reserve research paper, the COVID-19 pandemic has left an indelible mark on the global economy, prompting unprecedented fiscal measures to mitigate its impact. Among the notable consequences has been the accumulation of excess savings. However, recent developments indicate a significant shift in this landscape, with research suggesting a depletion of US excess savings.
The Surge in US Excess Savings
As a result of the fiscal transfers, aggregate demand soared. Yet, due to COVID-19-related restrictions, households were unable to spend these additional resources on services, which contributed to a substantial increase in personal saving rates globally. Advanced economies witnessed their savings rate double or even more, while emerging economies experienced more moderate changes. Notably, the United States’ trajectory deviates slightly from that of other nations. Its excess savings grew rapidly, peaking in the third quarter of 2021, but subsequently declined at a faster pace.
Data Source: Federal Reserve
The Depletion of US Excess Savings And Its Implications For Aggregate Demand
Consequently, the United States currently faces a depletion of excess savings, in contrast to other advanced economies that still retain a buffer of approximately 3 to 5 percent of GDP. The more accelerated drawdown of excess savings in the United States likely contributed to relatively stronger support for aggregate demand over the past year compared to other countries. However, the recent depletion brings forth uncertainties regarding the sustainability of this support moving forward. It remains to be seen how households will adjust their spending patterns and whether alternative income sources will replace the expired pandemic-era cash inflows. Meanwhile, the advanced foreign economies have witnessed a decline, albeit at a slower pace, while the emerging market economies experienced only a deceleration in their savings rate.
Contrary to this, another report from the Federal Reserve Bank of San Francisco suggests that Americans still possess around $500 billion in excess savings. The report anticipates that this reserve will endure until at least the end of this year. The distribution and allocation and wealth indicate that households, even those in lower income brackets, possess considerably higher liquid funds compared to the pre-pandemic period. This suggests that it could continue supporting consumer spending, at least until the fourth quarter of 2023. However, uncertainties persist, contingent upon factors such as households’ savings preferences, significant shifts in spending patterns, or alternative income sources to replace the expired pandemic-era cash inflows.
The depletion of US excess savings among marks a significant development in the aftermath of the COVID-19 pandemic. As these savings played a substantial role in supporting aggregate demand, their depletion raises questions about the future trajectory of consumer spending and the broader economy. It comes as there are already concerns regarding the Supreme Court’s decision to toss out President Biden’s student debt relief plan.