The Safety Net for the U.S. Economy is Bigger Than Originally Anticipated

October 11, 2023
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Stephanie Bedard-Chateauneuf
Revised data in September showed Americans' savings surged, extending their financial cushion and possibly delaying a predicted recession amid economic challenges.

Revised government data released in late September reveals that the accumulated savings of Americans, in comparison to their pre-pandemic savings, far surpass initial estimates by billions of dollars.

The Bureau of Economic Analysis conducted revisions indicating that the household savings rate was lower than previously assumed before the pandemic. The annual average savings rate for households between 2017 and 2019 was adjusted from 7.9% to 6.5%.

The combination of a lower pre-pandemic baseline and an increased savings rate in the current year led to a remarkable surge in the estimate of excess savings, soaring from the previous projection of $400 billion to a staggering $1.2 trillion, according to JPMorgan.

In a recent note, analysts mentioned that these figures suggest that households may not deplete their excess savings until sometime in the next year.

Société Générale echoed these findings, revising their estimate of household excess savings at the end of the second quarter to around $1.3 trillion, a significant increase compared to the estimates based on unrevised data.

The revisions made by the BEA were influenced by changes in the way they measure income from real estate investment trusts and mutual funds.

This could potentially serve as positive news for the economy. Previously, many economists believed that excess savings would be depleted rapidly. For instance, a study by the San Francisco Federal Reserve, updated in August, projected that excess savings would likely run out by the third quarter of 2023.

The revised data indicates that Americans still have a financial cushion to sustain their spending. This newfound financial resilience may instill confidence in some Americans regarding a smooth economic landing over the next few months. As a result, some economists are also reconsidering the timing of an anticipated recession.

This development holds promise for an economy grappling with elevated borrowing costs for households and an inflation rate that remains above the Federal Reserve's target of 2%. According to data from the Federal Reserve for the second quarter of 2023, U.S. household net worth increased by $5.5 trillion, reflecting that Americans are simultaneously increasing their spending while saving more.

Although Americans have been drawing down their savings to some extent, savings rates have declined from 11.4% in 2021 to 3.3% in the past year. As of August, the rate stood at 3.9%, well below the 8.9% average observed over recent decades.

However, it's worth noting that a significant portion of these excess savings is concentrated among wealthier Americans. A Bankrate survey from June disclosed that nearly half of adults had either less savings or no savings compared to the previous year. Furthermore, over a third of respondents reported having more credit card debt than cash reserves.

Interestingly, consumer spending continues to rise, with Americans spending 5.8% more in August compared to the same period the previous year. Even as some Americans express pessimism about the economy, many are still allocating their resources to expenditures like flights, concerts, and road trips. The revelation of greater excess savings than previously thought may serve to uplift the spirits of Americans who have been feeling uncertain about the economic outlook.