14-Jul-23 Macro

After the pandemic savings glut

Why we think there might still be excess savings left, even among U.S. households, to keep the global economy rolling for a little longer.

Trends in savings among U.S. households have been very uneven across different income groups

* Level of U.S. households' deposits by income group and its percentile

Sources: Federal Reserve Board (FRB), DWS Investment GmbH as of 7/12/23

We are not quite so sure, but find the analysis intriguing. As our Chart of the Week shows, the decline in excess U.S. savings appears highly uneven, if one looks at household bank deposits at different levels of income[1] Much of the savings depletion took place among high U.S. earners, within the top 20% of households grouped by income percentiles. Such households typically have lower marginal propensities to consume. Instead, the wealthy tend to smooth consumption over the lifetime of individual household members, reacting only slowly to sudden changes in wealth or income. The reverse tends to be true for less wealthy, lower income groups. As our chart shows, among lower income percentiles, there still remains some firepower in terms of bank deposits held by middle class and lower-income households. The working poor have also lately seen above average wage gains, reflecting tight U.S. labor markets. We believe, the remaining savings cushion of these groups should soften the blow, if and when the economy finally starts to shrink.

Behind all these trends also lie the many disruptions of pandemic life, from lockdowns to supply chain disruptions, which we all still vividly remember, but which will not be immediately obvious to future statisticians from just looking at the data. This points to a broader problem: how to interpret the most recent data in terms of extrapolating trend lines from it. Without getting too technical on this, the Fed economists’ excess savings estimates implicitly assume that households will be a lot more frugal than pre-pandemic trends would have suggested. This is in line with good econometric practice in recent years – but not necessarily true for this particular question.[2]

More generally, some theory does suggest that as an economy contracts, households, facing financial uncertainty, may generally wish to reduce their consumption and bolster their savings, which then get unwound as the economy recovers and households regain confidence. However, the ability of households to do so critically depends on fiscal and monetary policies paving the path to recovery, which historically have rarely been as generous as during the pandemic. Fascinating as early studies are, it will probably take quite a bit longer to fully assess the long-term implications. In the meantime, expect economists at the Fed – along with the rest of us – to remain, you guessed it, data dependent, not least in terms of household savings behavior.

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1. The Fed - Distributional Financial Accounts Overview (federalreserve.gov)

2. Helpfully, the Fed note also offers a useful comparison with 63 recessionary episodes in a total of 15 advanced and emerging economies since 1970 including both Covid recessions previous examples of household belt-tightening. This shows that excess household savings were actually quite rare, occurring only about 30% of the time in previous recissions of advanced economies.

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