Americans are drawing on substantial savings that they have accumulated during the pandemic. This is despite soaring inflation which has driven up the cost of food and housing.
Americans' cash reserves grew during the COVID-19 pandemic. They hunkered down and sheltered in place, and stopped spending money dining out, traveling, and other unnecessary expenses. They also received three rounds of stimul checks, additional unemployment aid, and Child Tax Credit payments.
According to Moody's Analytics, Americans' excess savings reached $2.7 trillion at their peak in December 2021. Inflation has risen to a 40-year high this year as food and gasoline prices have soared. This has caused household budgets to suffer as wages for many workers haven't kept up with inflation.
Mark Zandi of Moody's Analytics, chief economist, said that American consumers have substantial savings they have accumulated during the pandemic. This will help them to absorb this high inflation. They have enough savings to cushion the loss.
Due to the pandemic restrictions, high-income families lost money by not travelling, eating out at restaurants and spending as much as they would normally. Strong government support was available to low- and middle-income families, which included enhanced unemployment benefits, stimulus checks, as well as food, housing, and other assistance.
Zandi reports that Americans' excess savings had dropped to $2.5 trillion by May. This is more than 10% of the country’s gross domestic product (GDP).
Moody's discovered that only 20% of earners in the bottom 20% didn't tap into their pandemic savings in the first quarter.
This is because low-wage workers in hospitality, retail, and health care have seen wages rise faster that inflation.
Zandi stated that they have not begun to draw down their savings due to the strong wage growth of low-wage workers. "They have been receiving wage increases that exceed the inflation increases."
Real wages for middle and higher income workers have fallen, as they are growing slower than inflation.
Zandi estimates that lower-income households will have a six-month window to save money if inflation stays at 8.6%.
"We have a bit of room and we hope inflation will start to creep in over the next few months. These savings have provided a financial cushion for most households so far and consumers have continued to contribute," Zandi stated.
He said, "They aren't out spending with abandon, they're still not running for bunkers." They are still spending as they would normally, despite high inflation and a hit to real incomes.
However, despite the fact that they have a cushion in their pandemic savings accounts, Americans with lower incomes could lose their spending power if inflation rises and the U.S. enters recession.
Zandi stated, "With every passing month things are getting tighter but they have managed to get through reasonably well."
Wall Street economists predict that the U.S. will enter a recession within the next twelve months at 40%.
Zandi stated that American consumers are the only thing standing between an economic downturn and the U.S. Economy.
Zandi stated, "They are the firewall that keeps an economy from crashing into recession," It seems strong partly because of all the savings, even for low-income people.